Phoney war that we all could win

Moves by two of the UK's biggest mortgage lenders to reduce their standard variable interest rates have already posed a dilemma for borrowers. Is it better for borrowers to choose a consistently low standard variable rate, or a cheap discounted or fixed rate for a couple of years, followed by a higher SVR?

The Nationwide said last week that it is cutting its SVR from 7.09 per cent to between 6.49 per cent and 6.69 per cent, depending on the size of deposit. The Halifax is cutting its SVR from 7.5 per cent to 6.75 per cent. A million homeowners stand to benefit from the reductions, although Halifax customers will have to apply for the cheaper rate. A borrower with a typical £100,000 interest-only mortgage at the Nationwide's 6.49 per cent rate will see monthly mortgage payments fall from £591 to £540, while a similar Halifax mortgage will fall from £625 to £562 a month.

The Halifax is also introducing daily calculation of interest for borrowers on its new lower SVR, a move that should reduce the amount of interest paid throughout the term on repayment mortgages, while the Nationwide has decided to scrap its range of discounted and fixed-rate mortgages. It will replace these with just two 'budget option' fixed-rate loans.

The changes will not affect borrowers already benefiting from discounted mortgages. The rates they are charged will continue to be linked to higher SVRs until their discounts expire (7.5 per cent for the Halifax and 6.99 per cent for the Nationwide).

Both lenders claim their move is designed to change what they describe as a 'perverse' mortgage market where loyal existing customers pay a high SVR to subsidise new customers on low discounted deals.

Jennifer Stoddart, a spokeswoman for the Nationwide, says: 'There will be no differential rates. All customers will be treated the same.' In a statement sent to journalists, the society has challenged other lenders, saying: 'Look after your borrowers or lose them.'

But other lenders and mortgage brokers claim that the price war is phoney, designed to drum up publicity. Several lenders, including HSBC, Intelligent Finance, Standard Life Bank and Coventry Building Society, have pointed out that they already offer low SVRs for existing customers.

Geoff Seymour, a spokesman for Alliance & Leicester, believes both lenders have contributed to creating the price differential they are criticising by refusing in the past to allow existing customers to switch to their most competitive discounted and fixed rates. Halifax has recently restricted existing customers to a range of lacklustre tracker loans, while Nationwide, which has generally opted out of the remortgage market, offered an uncompetitive base-rate tracker or fixed-rate loan. In contrast, Alliance & Leicester allows its customers to switch to any of the loans it offers.

Seymour points out that new customers are very unlikely to opt for a lender's SVR: 'It's like going into a car show room, asking for the list price and getting your chequebook out.'

The Nationwide argues that when choosing a loan, customers should not just look at the headline interest rate but also consider the total amount payable over the mortgage term and the annual percentage rate (APR). The APR includes the cost of the lender's SVR after any special deal expires, plus mortgage indemnity insurance and any other fees the borrower has to pay. The Nationwide compares well in these circumstances, even at its 6.69 per cent rate, costing £158,121 for a £60,000 loan over a 25-year term, compared with £171,330 for a two-year discounted tracker from Abbey National, charging 5.74 per cent.

But borrowers rarely keep the same mortgage for 25 years. Even if they don't remortgage, they are likely to move home during that period, and this will provide a good opportunity to look for a new, cheap loan and thereby cut the overall amount they pay.

And brokers agree that even with the new lower rates offered by Nationwide and Halifax, existing borrowers will be better off shopping around for the best remortgage deals.

David Hollingworth of Bath mortgage broker London & Country says: 'While this is a concerted effort to keep customers, you can still do much better by switching to another lender.'

He is sceptical about the claim that all of Halifax's SVR borrowers will benefit. 'Because the new lower rate will have interest calculated on a daily, rather than annual, basis, borrowers will have to apply for the rate. Those that have not bothered to remortgage to escape the current high SVR may not get around to applying for the lower rate either,' he says.

Nationwide, which will not be able to offer daily interest calculation until the end of the year, will apply its new rates automatically to existing borrowers' accounts.

Ray Boulger of London mortgage broker Charcol is scathing about Nationwide's budget option loans. These offer low discounted rates in the first two years - 5.29 per cent for option one and 5.89 per cent for option two - but much higher rates in the next three, ranging from 7.29 per cent to 7.49 per cent for option one, and 6.89 per cent to 7.09 per cent for option two, depending on the amount of equity in the property.

Nationwide says these rates are designed to help borrowers out in the early years of buying a new home, when cashflow is tight, while charging the same amount of interest over the five years as the society's base rate.

But Boulger says: 'They are essentially newer versions of the old-style discount products, which carry trailer penalties. Comparing this proposition with the rest of the market, borrowers would do better to shop around.'

However, he believes the reduction in SVRs by these two big lenders will encourage other lenders to do the same: 'It's difficult to imagine that other lenders will not respond, and we expect the Halifax variable base rate to set a new benchmark which some other lenders will follow.'