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Lloyds TSB has signed a deal with Northern Rock to take on its mortgage customers as the beleaguered bank shrinks its balance sheet.

The three-year agreement will give Northern Rock mortgage customers an opportunity to 'fast-track' their switch to a Lloyds TSB product at the end of their fixed-rate period.

Customers who agree to the switch will have the usual application fee waived and get free legal and valuation work. Those who decide to stay with Northern Rock will go onto the bank's standard variable rate.

Northern Rock is attempting to reduce the number of borrowers on its books after its nationalisation.

Helen Weir, group executive director, UK retail banking for Lloyds TSB said: "The agreement offers Northern Rock customers a fast-track process to switch mortgage providers.

"Crucially, it will greatly reduce the uncertainty involved for customers who choose to switch providers and gives them peace of mind in the current uncertain market conditions. As Lloyds TSB customers they will also have access to the full range of products and services available from the UK's leading financial services provider."

Lloyds TSB said the deal will allow the bank to "accelerate new business growth in a low-risk manner".

Darren Cook, spokesperson for Moneyfacts.co.uk, said: "The new mechanism to support customers transferring their mortgage to Lloyds TSB is a welcome move.

"Current products from Lloyds TSB are only available for loans up to 90 per cent loan-to-value. We are concerned how Northern Rock plans to deal with those of its customers with loan-to-values higher than this, some as high as 125 per cent."

Lloyds TSB confirmed it has set certain criteria for the customers who will be written to with the offer.

"We are a very prudent and cautious mortgage lender and we are not prepared to dilute our mortgage book," a Lloyds TSB spokesperson said, although said customers who are not written to may still be able to get a mortgage if they approach the bank.

The deal should save the jobs of around 100 staff, Northern Rock said, adding customers would not be pressured into switching to Lloyds TSB.

"Essentially, this is just another choice for customers," a spokesperson for the bank said.

Following its transfer into public ownership, the bank announced it would shrink its balance sheets to a "sustainable level" and said it would need to increase the number of redemptions.

Staff levels at the bank are also set be cut – with as many as 2,000 jobs to go.

In its last trading statement on May 12th, Northern Rock said it had formed a panel to help customers find a mortgage with a new provider.