Rates move turns up heat on lenders

A full-scale home loans price war is set to break out after banking giant HSBC upstaged new-fangled rivals by slashing its standard variable mortgage rate by almost one percentage point - a move that will cut monthly bills for thousands of borrowers by an average of £600 a year.

HSBC (formerly known as Midland) this week cut its mortgage rate from 7.74% to 6.75%, and has introduced a guarantee that, from now on, its rate will never be more than one percentage point higher than the Bank of England base rate.

Its decision is likely to put pressure on other lenders to reduce their mortgage rates too, and shows just how rattled the banking old guard are in the face of ever-increasing competition from new entrants.

It came on the same day as the Halifax's new internet and telephone bank Intelligent Finance turned up the heat even further by announcing highly competitive rates on mortgages and savings. It also coincided with the latest Moneyfacts survey of the mortgage interest charged by the UK's 35 largest lenders which - surprise, surprise - showed that building societies and the new entrants beat the high street banking giants hands down when it comes to lower home loan rates.

HSBC's announcement means its standard mortgage rate is now way below the UK's 10 largest lenders, which charge between 7.29% and 7.75%. In fact, only a small handful of lenders can boast lower standard rates. They include Egg (6.69%) and Hinckley & Rugby building society's telephone banking arm (6.64%).

The move is particularly good news for HSBC's 300,000 existing borrowers because they will automatically be transferred to the new lower rate. The 100,000 or so borrowers on the standard variable rate will be switched over on September 24, while the others, who are predominantly on fixed and discounted rate deals, will go on to the new rate when their current fixed/discounted period comes to an end. HSBC says the average standard variable rate borrower with a £70,000 loan will save about £50 a month - £600 a year - at current rates.

The move is also designed to help HSBC attract new mortgage customers. By guaranteeing you will never pay more than 1% above the bank base rate, it has effectively created a tracker mortgage which is one of only a few to meet the government's CAT standards on charges, access and terms. There are no lock-in early redemption penalties, you're not required to buy their insurance, early repayments can be made at any time, and interest is calculated on a daily basis.

So what are the downsides? There are some. Those borrowing more than 90% of the property's value have to fork out an extra 0.15% over the standard rate for the first three years, which lifts what they pay to 6.9%. Another is that the deal technically isn't a fully-fledged CAT mortgage yet because it won't be available to existing customers until September.

Also, while it's a very good low standard rate, there are no special discounts on offer to tempt people to take it out - if you're looking for a good upfront deal you could do a lot better, says Phillip Cartwright at brokers London & Country Mortgages.

For example, Britannia building society is offering a 2.1% discount off its base rate for two years, giving a current payment rate of 5.54%. When the two years are up you go on to the society's standard rate - currently 7.64% - but as there are no redemption penalties at any time, there is nothing to stop you from walking away.

However, HSBC says that what it is offering is "a long-term highly competitive rate to give people the security of knowing they are not going to have to chase rates forever and a day". In other words, if you're the sort of person who cannot be bothered to keep changing your mortgage every couple of years to take advantage of the very best rates, it is well worth a look.

This week's survey from financial data specialists Moneyfacts shows the total interest paid on a £50,000 standard variable rate mortgage between 1 July 1999 and 30 June 2000, and also shows how much someone has coughed up over the past three years.

It reveals that the difference between the cheapest and the most expensive lender over 12 months is a whopping £691. Standard Life Bank comes out cheapest, with a total interest bill over 12 months of £3,225. Two societies, the Cheshire and the Coventry, came second and third with £3,276 and £3,319 respectively, though these figures are based on borrowers who have been members for at least five years and therefore qualify for a lower rate.

The table provided further proof that mutual organisations tend to offer consistently lower mortgage rates - of the top 10 lenders, all but one is a building society or owned by a mutual. Again, the big high street banks and converted building societies have performed dismally.

Halifax, Abbey National, Barclays, NatWest, Alliance & Leicester and Woolwich are all near the bottom of the table, with total annual interest repayments of between £3,647 and £3,652. However, it is worth bearing in mind that for many people their lender's standard variable rate is pretty irrelevant because they are on a fixed or discounted rate.