Lower home rates make sense for lenders

Lower home rates make sense for lenders

Does yesterday's cut in mortgage rates by Abbey National signal the start of a fierce and commercially suicidal price war among home lenders? Or is it more a case of clever marketing? At this stage it looks like more of the latter. Indeed, one of the big surprises in Abbey's cut, which was followed quickly by Northern Rock, is that it took so long coming.

Banks and building societies have been living off fat margins in their admittedly sluggish mortgage lending for too long already. With the bad debt problem probably having eased to a low point, the persistence of high lending rates looked increasingly unsustainable. In that market context, there is a certain logic to Abbey's move, which will probably be followed by some of the other big lenders.

Furthermore, it is not at all clear at this stage that the move will in any way damage profits in these organisations. What borrowers gain is almost certain to be clawed back from savers, who should expect to see the rates on their deposits pared back.

Retail money is flowing into building societies at an exaggerated rate right now, a reflection perhaps of popular nervousness at the volatility of the stock market and, more generally, a reaction among many people to the uncertainties of the times. Hunting the next windfall profit has added to the process. There appears to be considerable confusion among the general public about which building societies should be targeted with speculative savings accounts in the hope they may convert to plc status and pay out cash windfalls. Even Abbey National, which converted to a bank as long ago as 1989, has been benefiting from this rush to open pounds 100 windfall accounts. The downward pressure on saving rates exerted by this retail inflow suggests banks and building societies will be able to absorb the reduction in lending margins with no pain at all.

The Abbey move also captured the imaginations of those in the market increasingly convinced not just that the next move in British interest rates is downwards, but that the turning point is nigh. The short sterling futures contract used by the City to speculate on interest rate changes reacted enthusiastically to the news.

But in the current extremely tense housing loan environment, nobody can ignore the aggressive overtones of Abbey's move. With the lending market itself having almost slithered to a halt - transaction levels are at some of their lowest levels in recent memory - the name of the increasingly ruthless game being played out among lenders is that of grabbing market share from each other. Lenders are having to resort to all sorts of tricks to hold on to their existing customers in the face of salivating predators promising ever better deals, while attempting to whip round the back and pinch their rivals' clients.

With no immediate prospect of a revival in the housing market, the only way to grow the lending business seems to be such wheezes as discounts of up to 5 per cent in the first year, or cash-back deals of around pounds 6,000.

In such a competitive climate, Abbey's move looks rather unfocused. It is hard to see how 35 basis points off lending rates is going to give any significant edge compared with the other inducements commonly on offer.

No doubt other lenders will follow, or even better, Abbey's move, but it is nonethe