Northern Rock has denied its decision to increase rates on its sub-prime mortgages is part of a greater strategy to withdraw from the sector.

It has announced that rates on its sub-prime deals, which are underwritten by Lehman Brothers, will increase by as much as 1.25% - adding around £75 to the cost of a typical monthly repayment.

The move could price the firm out of the market, but the group said it is simply reacting to competition.

Northern Rock entered the sub-prime sector earlier this year as part of a tie-up agreement with the Lehman Brothers subsidiary SPML.

Under the deal, the bank receives an introducer's fee for selling a sub-prime mortgage but the risk remains with SPML and stays off Northern Rock's balance sheet.

But the global credit crunch, caused by the recent crash in the US sub-prime market, has resulted in tougher times for UK lenders.

Sub-prime specialists have found it increasingly difficult to attract investors to help finance their mortgage book, especially at the heavy adverse end of the market, which is focused towards those with a poor credit repayment history.

A number of other sub-prime lenders have recently upped their rates, with Kensington Mortgages announcing a 0.55% rise, while Victoria Mortgages has raised the rate on some of its products by up to 2.5%.

Northern Rock said its decision is simply a response to the changing face of the sector.

A spokesman for the bank said: "This is a price increase reflecting the competitive nature of the market."

He added that "at this stage" there is no intention to move out of sub-prime lending.

But it has been suggested that putting rates up is a shrewd way of withdrawing from the market for the time being.

David Hollingworth, of mortgage broker London and Country, said: "It is obvious that if you are way down the list in terms of rates you will not get the same level of business.

"Virtually turning the tap off may suit Northern Rock for the time being, until the market settles down.

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