Promise of ?1.5bn windfall as lender cuts rate

Millions of homeowners could save a total of £1.5bn a year if the country's big lenders copy a bold move by Nationwide building society to cut rates for customers who have paid too much for their mortgages over the past year.

The country's second largest mortgage lender admitted its decision to redress the unfair treatment of more than 400,000 of its borrowers would cost £90m this year.

But Nationwide said the financial pain would be even greater for its high street banking rivals who charge interest rates of up to one percentage point higher.

A Nationwide customer benefiting from the decision and with a £50,000 home loan can expect to be £250 better off.

The compensation is being paid after the financial services ombudsman decided in favour of a Nationwide customer who was left stranded on the society's old standard variable mortgage rate of 5.24% after it announced a lower rate last February for new borrowers.

Nationwide is compensating customers who paid too much and putting them on the new, lower rate - currently 4.74%.

Other mortgage lenders have also had decisions by the ombudsman against them, particularly Halifax, HSBC and Abbey National. The ombudsman's decision is causing controversy, however, as it can only rule on a case-by-case basis rather than set out a policy for the industry.

The lenders have reacted in a variety of ways. Halifax, the country's biggest, is prepared to compensate customers only on a case-by-case basis. Nationwide, though, has decided to make cash payments to all 400,000 of its affected customers by the end of June.

Throwing down the moral gauntlet to the big banks to match his stance, Philip Williamson, Nationwide's chief executive, estimated their customers would be £1.5bn a year better off if they too put their customers on lower rates.

But industry experts believe that matching the move could cost Halifax as much as £250m and Abbey National, which has yet to receive a final decision from the ombudsman on its case, up to £150m.

Mr Williamson played up the Nationwide's mutual credentials as he cast doubt on the banks' willingness to follow his move because of the impact on their profits. "Halifax have a different set of priorities to us. They are a bank that has shareholders," he said. He also stepped up the competitive pressure on Halifax. "We're 20% cheaper than they are. Why would you stick on a Halifax rate? It's a nonsense," Mr Williamson said.

His provocation prompted a tough response from Halifax - which reacted to the ombudsman by scrapping its new, lower rate of 5% and returning to its old 5.75% rate.

A Halifax spokesman said the ombudsman's decision was only specific to the customer who made it and Nationwide's savers - the majority of its members - would end up with lower rates.

Halifax also believes that the benchmark rate used by Nationwide is irrelevant as most customers now have fixed or discounted rates.

"We have 50 products in our mortgage range and 30 of them offer lower rates than Nationwide's 4.74%." the Halifax said.

Mortgage brokers welcomed Nationwide's move on the grounds of fairness to customers. Ray Boulger, senior technical manager at mortgage brokers Charcol, said: "Nationwide has followed the spirit of the ombudsman's ruling rather than putting customers through the hoop [of asking for their case to be considered]."

But questions were also raised about its long-term impact on the society. Simon Jones, associate director of Savills Private Finance, said: "I would question their ability to offer "new business rates" going forward given such a competitive [rate] across all their book. Their next repricing of mortgage products will be watched with interest."