Fresh salvoes on the mortgage front

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THE SMELL of cordite wafted across the mortgage battlefield last week, as lenders fired fresh broadsides in the increasingly competitive war to provide cheap home loans to their customers.

First into action was Bradford & Bingley, which announced a bonus package to its 2 million members in its bid to persuade them of the benefits of the society retaining its mutual status rather than yielding a one-off windfall. Bradford & Bingley said it was cutting its headline variable mortgage rate to 7.24 per cent from March, reducing the monthly cost of a pounds 50,000 loan by pounds 10 to pounds 275.

The society's reduction was followed on Friday by Direct Line, the telephone insurer which moved into the mortgage market a year ago. From mid-February, the cost of a pounds 50,000 loan from Direct Line will be pounds 246, at a rate of 6.49 per cent.

No sooner was this announcement made than Bradford & Bingley Mortgages Direct, the society's telephone-based service, replied with a cut in its own variable rate to 6.25 per cent, the lowest in the mortgage market. The new rate, which will also apply from March, brings the monthly cost of the same loan down to pounds 237.

These new offers bring the cost of some mortgages to their lowest point in 30 years. However, big lenders, including Halifax, Woolwich and Abbey National, claimed the latest reductions would not tempt them into slashing their rates still further.

Their aloofness may be short-lived. Nationwide is preparing a pro-mutuality loyalty package which may include further mortgage cuts. Other societies, including Skipton and Britannia, are planning to follow suit. There is also the prospect of further base rate reductions in the next few months.

The market's belief in the inevitability of further rate cuts means it is also possible to fix mortgages very cheaply.

For example, FirstMortgage, another telephone lender, last week launched a mortgage fixed at 6.99 per cent for the next five years (then variable), available on loans of up to 75 per cent of a property's value. FirstMortgage's offer is a no-strings deal, with no redemption penalties if the mortgage is paid off after five years and no arrangement fees.

But perhaps a wiser choice at present is to opt for a discounted rate, where a certain percentage is taken off a variable mortgage. This way, if rates fall further this year, as expected, so does the cost of the loan.