Nationwide rate cut creates challenge

Nationwide building society yesterday cut its standard mortgage rate by 0.2% in a move that will reduce the average borrower's bill by £120 a year and puts pressure on other lenders to trim their borrowing costs.

The announcement represents the latest manoeuvre in the cut-throat battle for home loan customers and underlines Nationwide's belief that interest rates have peaked and the next base rate movement is likely to be down.

From December 1, Nationwide's standard variable mortgage rate will drop from 7.29% to 7.09% - 0.65% below the standard rate of many of its competitors. But there was also disappointment for the society's 8m-strong army of savers with the news that savings rates will be reduced.

Home owners hoping their mortgage company will im mediately match the Nationwide's cut are likely to be disappointed - Halifax and Abbey National, the two biggest lenders, last night gave no indication that they planned to cut rates ahead of any base rate move.

New figures show that remortgaging has reached record levels as growing numbers of people become aware of the money they can save by switching to another lender's deal. Last month, for the first time, remortgages made up a third of all new mortgage lending, the Council of Mortgage Lenders said.

Nationwide and the other traditional lenders are having to fight hard to hold on to their borrowers, many of whom are being lured to more attractive deals by new entrants, some of them internet-based.

This month saw the arrival in the UK of Australia's biggest financial services company, Commonwealth Bank of Aus tralia, which is offering a range of flexible mortgages through an internet and telephone venture called NewWorld.

In the summer HSBC cut its standard variable mortgage rate by almost one percentage point, and the Halifax's new phone bank, Intelligent Finance, launched with a competitive rate.

Nationwide said someone with a £60,000 interest-only mortgage would see monthly bills cut by £10 a month (from £364.50 to £354.50). For a borrower with a £100,000 loan the saving would be £16.66 a month.

The Bank of England has kept interest rates on hold since February and there is a growing expectation among commentators that the next interest rate movement is more likely to be down than up, said Nationwide.

Rivals said the Nationwide move showed the mortgage price war was taking its toll.