Phoney war to real mortgage battle

The mortgage price war, described as phoney by many lenders last week, is set to become a real battle. Several lenders, including Bristol & West, Portman and Birmingham Midshires, are withdrawing their most competitive discount mortgage deals ahead of a cut to their standard variable rates, according to mortgage brokers.

'Discounts are narrowing in order to reduce lenders' exposure if they get into the price war and cut their standard variable rates,' says Mark Harris of independent financial adviser Savills Private Finance.

Nationwide Building Society started the ball rolling almost two weeks ago when it trimmed its variable rate for existing customers from 7.09 per cent to between 6.49 and 6.99 per cent, depending on the size of the deposit.

The move was swiftly followed by Halifax, Britain's biggest mortgage lender, which cut its SVR from 7.5 per cent to 6.75 per cent.

Lenders are keen to hang on to existing customers and increase market share by bringing their SVRs into line with the more attractive ones offered to new customers. There has been speculation that the moves by Halifax and Nationwide would prompt a step away from special deals in favour of lower standard rates.

It is too early to tell how the market will shake down, but lenders have started to shave the discounts on some of their special deals.

Portman has repriced its stepped discount mortgage. It now starts with a discount of 3 per cent instead of 2.5 per cent. Bristol & West has pulled its discount mortgages as well as all its fixed- and capped-rate deals below a certain level.

Northern Rock opened up its whole product range to existing borrowers - but did not cut its SVR.

Woolwich has also tweaked its range but says this was in response to the Bank of England base rate reduction rather than manoeuvres by Halifax and Nationwide.

The rest of the market is now waiting to see how Abbey National responds before deciding whether to implement rate cuts of their own.

Ray Boulger of mortgage broker Charcol says: 'Abbey is key. It is the second-biggest lender and an old foe of the Halifax, so it will not want to take a back seat. If it cuts its SVR, it puts pressure on the other lenders to do the same. Cheltenham & Gloucester, another top-five lender, does not have the same reputation for aggressive pricing.'

An Abbey spokesperson says: 'We are committed to remaining competitive and reviewing our different options. We will not be forced into a knee-jerk reaction. We want to be sure any change is in the interests of our customers, intermediaries and shareholders.'

C&G says it is waiting for the market to settle before it makes a decision.

Although existing borrowers are set to benefit from the SVR cuts, it is not all good news. If you already have a discounted deal with Nationwide or Halifax, you won't be able to benefit from the new rates at all until the discount period is up.

Interestingly, borrowers do not seem to have swallowed the bait offered by Halifax and Nationwide. Figures from online mortgage broker moneysupermarket.com indicate that although the mortgage war has stimulated interest in mortgages and applications, it has not significantly affected sales of Nationwide or Halifax products. Most applications have been for discounted and fixed deals from smaller mutual lenders.

So if you have a home loan with a lender that slashes its standard variable rate, are you better off staying put or remortgaging to a discounted mortgage with a different provider?

Brokers say it is still worthwhile hunting for a new deal, as long as you are not going to be subject to a redemption penalty and your mortgage is more than £40,000.

'The changes will narrow the difference between rates on new and existing mortgages, but there is still a difference,' says Charcol's Boulger.

David Hollingworth of Bath-based London & Country agrees. He recommends Halifax's own tracker mortgage, which has a rate of 5.35 per cent at present for both purchase and remortgage. It also boasts free legal work and daily interest to boot.

There is no danger of competitively priced deals disappearing, according to Hollingworth. He says: 'Halifax still offer new borrowers an aggressively priced range and the others will have to keep doing likewise just to compete.

'If Halifax had scrapped the special rates for new borrowers, that would have heralded some sort of fundamental change. But it didn't.'