Losses have more than doubled since the first half of last year, when the nationalised lender reported a loss of £585.4m.
In 2007 the bank made a loss of £167.6m.
Gross mortgage lending for the bank has contracted severely, reflecting the bank’s initial intention to reduce the size of its £26.9bn government loan.
Gross mortgage lending went from £29.5bn in 2007 to just £2.9bn in 2008.
Residential mortgage balances reduced by 27% to £66.7bn, a fall of 27% compared with £90.8bn at the end of 2007.
Arrears over three months jumped from 0.45% to 2.92% during the course of the year, above the Council of Mortgage Lender’s average of 1.88%.
Its Together mortgage range was the worst performing in the loan book, going from 0.95% at the end of 2007 to 4.53% at the end of last year.
Northern Rock’s policy to run down its book last year resulted in the lender reducing its government loan by £18bn to £8.9bn on a net basis.
The bank has now pledged to return to the mortgage market and has committed to £14bn to fund new mortgage lending over the next two years.
A bigger focus had been given to attracting deposits, and retail deposit balances rose from £10.5bn in 2007 to £19.6bn in 2008.
Gary Hoffman, chief executive of Northern Rock, says: “Northern Rock has made good progress against the business plan objectives laid out in March 2008.
“The government loan has been reduced significantly, and the deposit base of the company has grown as customers have returned to Northern Rock.”
He adds: “We can now return to what we do well – mortgage lending.
“Our return to the mortgage market will be governed by focussing on responsible lending, understanding our customers’ needs, and offering them great products and service.
“We have an exciting opportunity to help consumers in the mortgage and savings markets and to secure the long-term future of the company, while protecting the interests of the taxpayer. I am confident that we will deliver on that opportunity.”