Barclays heightens home loans war

Barclays yesterday fired the latest shot in the mortgage price war by changing the way it calculates interest on its home loans. The change will cut monthly bills for 130,000 existing customers.

The bank said it was the first top 10 lender to calculate interest daily for all its mortgage customers, saving them thousands over the life of the loan.

The move, which the bank admitted would cost it "fairly big money", comes amid anxiety in the City that both established lenders and new entrants are stepping up the war over home loans. While potentially good news for borrowers, City analysts believe that this could dent banks' profitability.

HSBC last week cut almost one percentage point off its variable mortgage rate. Halifax's new telephone and internet bank, Intelligent Finance, starts selling its competitively priced products this week.

Newcomers such as Egg -still 25% owned by Prudential - have also suffered. While Egg shares recovered some lost ground yesterday, at 139.5p they were still below the 160p at which they were sold to investors last month.

Barclays said the change in interest calculations from August 1 will mean lower monthly payments for more than 130,000 existing repayment mortgage holders, and will also apply to all new customers.

It is also an attempt by the bank to restore its reputation, battered by branch closures, and rows over chief executive Matt Barrett's pay and cash machine charges, which have since been dropped.

"Customers do not need to apply for this or switch to a new product to get the benefits, as is the case with other top 10 lenders," Barclays said.

The change means that every mortgage payment a customer makes will immediately reduce the amount on which interest is charged.

Many other major lenders use the "annual interest" system, which results in borrowers paying interest on debt they no longer owe. Some, such as the Halifax, will credit interest daily - but only if customers ask for it. A growing number of the new banks have brought in daily interest as standard.

A customer with an £80,000 repayment loan would see the monthly bill reduced from £610 to £603 - saving £2,091 over the 25-year term at today's interest rates.

The monthly payment on an £80,000 mortgage is cut from £610 to £603 when interest is calculated daily instead of annually.

Over a 25-year term the saving is £2,091 at today's interest rates.

Extra payments reduce the outstanding balance and interest payable from the date they are credited. Minimum payments are £500 for base-rate trackers and £1,000 for other repayment mortgages. Customers with interest-only loans can benefit by making lump sum repayments of capital.