Savers could lose in mortgage price war

Headlines screaming about mortgage price wars are guaranteed to delight homeowners. Even if borrowers do not benefit from the latest moves by big-name lenders, the idea that rates are under pressure is comforting.

As yet, the cuts by Nationwide and Halifax are a skirmish rather than all-out war. In each case the price cuts come with strings attached (see page 10) and other big-name lenders are standing by to see how the tussle develops before committing their marketing troops. But the City is certainly standing by for an escalation in the conflict. Banking shares were marked down after Halifax's announcement last week on fears of a general reduction in profit margins.

The big difference between what Halifax and Nationwide are doing with their mortgage rates now, and what has happened in the past, is that they have cut dramatically the cost of borrowing to existing customers.

And Nationwide is attempting to simplify things, by axeing discounts. For years now, all the action on mort gage rates has been over discounts, fixed rates and special deals. But these products have been subsidised by borrowers paying standard rates.

The moves by Halifax and Nationwide are an admission that these borrowers feel they are being ripped off. Other lenders overcharging their standard rate borrowers may indeed have something to fear.

The unanswered question is where savers stand. Traditionally they have tended to pay for mortgage price wars although Halifax denied last week that savers would foot the bill.

If lenders wanted to fund a mortgage war by slicing into savings rates, they might judge the conditions are right. Competition from some of the new players in the savings market is abating a little: First-e, for example has cut rates by up to 1.5 per cent, Egg by up to 0.75 per cent for customers who operate by telephone, and Smile by up to 0.5 per cent. All against a base rate cut of just 0.25 per cent. Other savings organisations are also cutting by at least as much as the base rate cut on some accounts. Millions of savers in older accounts with banks and building societies are already earning derisory returns, subsidising accounts used to pull in new customers.

Banks are unlikely to change their approach to savers unless they start following borrowers out of the door.