The move means the monthly cost of a typical pounds 50,000 loan has fallen by about pounds 55 since last summer, including yesterday's reduction, worth pounds 17.
Brian Davis, the society's chief executive, yesterday held out the promise of further cuts if the Chancellor, Kenneth Clarke, reduces base rates in two weeks. He challenged other lenders, including Abbey National, Halifax, Alliance & Leicester and Woolwich, to follow Nationwide's example.
Mr Davis said: "If the banks and building societies do not match our move, then this will aptly demonstrate to our customers the advantages of being with a building society committed to its mutual status.
"If they do follow our lead, then Britain's borrowers and savers will be better off by over pounds 2bn a year and we will have demonstrated the value of ... competition."
Nationwide's handing of pounds 200m annual profits back to its members, is the most powerful broadside so far in the battle between societies seeking a stockmarket listing and those determined to stay mutual. Nationwide's 6 million savers also stand to gain by an immediate 0.25 per cent increase in their savings rates.
Bradford & Bingley and Skipton building societies welcomed the decision. John Wriglesworth, a senior manager at Bradford & Bingley, said: "This is like England during the second World War. After holding out on our own for so long, America has just joined the war on our side."
Both said they were reviewing their own rates and promised announcements in weeks. One expert predicted Skipton may cut its rates below Nationwide's.
Cheltenham & Gloucester, the former building society now owned by Lloyds Bank, said it also would review its rates. C&G has guaranteed its 600,000 borrowers that it will undercut rates charged by Britain's top five lenders
Halifax said yesterday it would not budge on the cost of home loans. "Mortgage rates are already at their lowest levels for many years and, therefore, a cut is not really justified," said David Gilchrist, the society's general manager.
Charles Toner, managing director of Abbey National's retail division, said: "Moves of this kind are not sustainable in the longer term."
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