Rate cut sparks mortgage war

Halifax, Britain's biggest mortgage lender, is expected to cut the cost of borrowing today - escalating a mortgage war among high street lenders.

The first shot was fired yesterday by the Nationwide, the country's biggest building society, which unveiled a new basic mortgage rate of 6.49% - about 1% lower than the standard variable rate of its rivals - and accused the high street banks of overcharging by £1bn.

For a homeowner paying a £60,000 interest-only mortgage the rate cut would mean average savings of about £30 a month.

The move provoked a swift response. Today the Halifax, which has 2.5m customers, will announce a cut in its borrowing rate from 7.5% to 6.75% from March 1.

By cutting their rates, the two lenders are substantially widening the gap on their rivals which are offering standard variable rates, paid by around half of all homeowners, as much as one percentage point higher at 7.5%. They might also fuel house price rises by making it cheaper to borrow.

Nationwide said about 3m borrowers, with mortgages totalling £100bn, were on standard mortgage rates.

The moves reflect the increasingly competitive nature of the mortgage market. One in three new home loans is merely a customer moving their mortgage to a bank or building society with a more attractive rate than their current lender.

Both the Halifax and Nationwide are desperately trying to keep their customers and deter them from being lured to rivals.

Many high street names are offering cheap deals for new customers while keeping current borrowers on high rates. The Nationwide and Halifax intend to make their rates available to all customers to banish this discrepancy.

Brian Davis, Nationwide's chief executive, tried to up the ante in the mortgage market, saying: "If the banks don't look after their borrowers they will lose them. Nobody should be paying 7.5% on their mortgage and now nobody needs to. Get a better deal from your lender or come to Nationwide."

Rivals mocked the building society's move. Abbey National, the second largest lender, said of Nationwide's package: "It is extremely complicated."

The Woolwich, now owned by Barclays, said Nationwide was "undercutting" the market. It added that customers were free to remortgage to a better deal if they wanted.

At mortgage broker Charcol, Siobhan Hotten said that while the Nationwide's move was "great news" for many of its customers it was unlikely to win it much new business.

Rivals are also certain to point out that while Nationwide and Halifax are focusing their attention on standard variable rates, an increasing number of homeowners are on specialised deals, such as fixed or discounted rates.

Even with its mortgage rate cut, City analysts calculated that the Nationwide's rate was still profitable. They said the lenders' rate is still above the Bank of England's base rate of 5.75% and none have improved the rates on savings.

As a building society, the Nationwide's members will carry the cost of the reduction, while Halifax's shareholders will be expected to take the hit.

The former building society, which became a bank four years ago, is due to publish its profits figures today. It has already warned the City that it expects its profits margins to be damaged by a battle for customers.

Halifax's existing 2.5m customers who want to take advantage of the new rate will not automatically be transferred but have to apply. The company refused to comment.

What you pay


Standard variable rate%

Nationwide 6.49*

Halifax 6.75**

Abbey National 7.49

NatWest 7.49

Barclays 7.5

C&G 7.5

Source: Moneyfacts (excluding Halifax)

* base mortgage rate

** expected to be announced today