Northern Rock is paying its loan to the Bank of England back ahead of schedule but the deterioration in the economy has led to an increase in mortgage arrears.

The bank said as of September 30th 2008, the net balance outstanding on the loan stood at £11.5 billion, a reduction of £15.4 billion since the start of the year.

The nationalised bank said its success in repaying the loan was down to helping its customers transfer their mortgage to other providers but this will be more challenging in the future due to the lack of financing currently available.

Chairman Ron Sandler said: “We have continued to repay the government loan well ahead of plan, our deposit base is growing, our restructuring programme has been completed successfully, and a new and stronger management team is now in place.

“These are encouraging developments. However, dislocated financial markets and falling house prices mean that the pace of progress achieved to date will be significantly more challenging to maintain going forward.”

The Newcastle-based bank also said despite the rush of customers in September wanting to deposit their savings with a government-backed institution, it kept its share of UK retail deposit balances to 1.5 per cent.