Lender tackles Halifax

A SMALL mortgage lender is planning to challenge Britain's biggest building societies, including Halifax, Alliance & Leicester and Woolwich, by offering home loans that would still allow their members to benefit from an estimated pounds 15bn flotation bonanza next year.

FirstMortgage is considering plans to offer highly attractive loan rates while allowing members of de-mutualising societies to receive shares worth up to pounds 1,000 each.

And by striking at the underbelly of more than 2 million building society members who feel unable to switch mortgages at present, FirstMortgage's move dramatically raises the stakes in the mortgage price war that intensified with a 0.25 per cent base rate cut on Friday.

A decision on whether the idea was feasible would be reached next week, said Nick Deutsch, chief executive at FirstMortgage. "We are talking to our lawyers and bankers to be certain that we are not taking inordinate risks with our funds," he said. "Technically, it is feasible. But there are still areas that we are looking at before we make a final decision."

The plan involves taking the risk of a second charge for the property on which it lends. Borrowers would get a slightly higher but still very competitive rate, until their society de-mutualises and they receive their free shares. Thereafter, the rate would drop even further.

Halifax, Woolwich and Alliance & Leicester are all planning to float on the Stock Exchange next year, giving each of their 15 million combined members a share in the proceeds. Up to 60 per cent of the three societies' total 3.2 million borrowers are on variable mortgage rates at up to 0.5 per cent higher than those of rival lenders. Some critics argue that, despite last week's 0.25 per cent rate cut, the de-mutualisers' unwillingness to cut the cost of mortgages even further is based on the belief that many members are a captive audience.

Although it is theoretically possible to leave just pounds 100 or pounds 200 in a society mortgage account and take out another loan elsewhere, rival societies have been loath to lend the money because they would be taking a second charge on the property.

FirstMortgage is mostly owned by Foreign & Colonial, the fund management company.

Your Money, pages 12, 18

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