Many thousands of Northern Rock mortgage borrowers will become financial “prisoners”, dumped into the rump of the lender’s so-called bad bank, it emerged yesterday.

Giving evidence at the House of Commons Treasury Select Committee yesterday, Keith Morgan, head of wholly owned investments for UKFI, the body set up to manage government stakes in Britain’s state-controlled banks, said that the process to carve up Northern Rock before a private sale would leave about 85 per cent of mortgage borrowers trapped within a business that was being run down.

His comments will come as a blow to the 476,000 mortgage borrowers whose home loans will be transferred to the bad bank because they will be unable to remortgage elsewhere.

The bad bank — to be called Northern Rock Asset Management — will not offer new deals to customers. The Government is hoping that those borrowers will remortgage with another lender, but many will have little choice but to remain with Northern Rock.

Borrowers transferred into the bad bank will include those who took out its notorious “Together” deal during years of the housing boom, which offered buyers a loan worth up to 125 per cent of the value of a property. Falling house prices have meant that more than a third of Northern Rock’s borrowers are now in negative equity — with a debt worth more than the value of their home.

The Government is pushing ahead with plans to slice up Northern Rock into healthy and toxic assets and to then sell the good part of the bank to the private sector. Gordon Brown wants to be able to announce that he has returned one of the bailed-out banks to the private sector to prove to voters that his financial rescue model is paying off.

During the Treasury Select committee hearing, John Kingman, the chief executive of UKFI, who is leaving to take a job in the City, said that Royal Bank of Scotland would take “years” to sort out and place itself on a stable footing, a view that he believed was shared by Stephen Hester, the bank’s chief executive.

As the cross-party Select Committee questioned UKFI yesterday, it also emerged that Alistair Darling had effectively gagged the shareholding group from publicly disclosing the size of the RBS bonus pot for 2008. However, Mr Kingman conceded that the public were “bewildered” over why bankers should receive bonuses when they had run businesses that had to be bailed out by taxpayers.

Mr Kingman, a Treasury mandarin who is expected to join a leading financial group, explained that he had told bailed-out lenders such as RBS that they existed only because of the taxpayers’ support.

During the committee hearing, which is chaired by John McFall, MPs heard that UKFI has no plans to establish a separate process that would help Northern Rock’s beleaguered borrowers.

About 10 per cent of the loans transferred to Northern Rock’s bad bank could also be in arrears. Northern Rock released a quarterly statement yesterday reporting that the number of its borrowers who were unable to meet their mortgage payments had climbed to 4.11 per cent last month, from 3.92 per cent at the end of June.

Borrowers with good credit histories and a low loan-to-value ratio will be able to remortgage to another bank or building society at the end of their current deal.

But borrowers in negative equity or those with a chequered repayment history will have to sit it out on the bad bank’s standard variable rate (SVR) of 4.79 per cent.

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