The reduction was immediately matched by Yorkshire Building Society, making the two societies the cheapest high street lenders in the market.
Nationwide and Yorkshire said the new rate, 0.25 per cent lower than before, would apply to both new and existing borrowers from 1 May. It brings down the monthly cost of a pounds 60,000 endowment mortgage by almost pounds 24.
Savings rates will also be cut by the same amount, but Nationwide insisted its rates would remain competitive.
Nationwide's and Yorkshire's initiative is part of a growing division between societies which are determined to remain mutual, while most of their rivals have announced plans to float on the stock market.
Brian Davies, Nationwide's chief executive, said: "Our latest move ensures that both our savers and borrowers will continue to have a real competitive advantage, demonstrating, once again, that you really are better off with a building society."
Despite the Nationwide's announcement, the Chancellor, Kenneth Clarke, was yesterday urged by the Treasury's panel of independent forecasters, the six "wise persons", to be cautious about further reductions in the cost of borrowing.
Although they welcomed recent base rate cuts, two said there was a case for increasing them, if the Government was serious about its inflation target. Another three thought the next move in rates would not necessarily be downwards. Only one urged a reduction. Some City analysts argued the Chancellor could squeeze in another quarter-point cut to 5.75 per cent at the meeting between Mr Clarke and Eddie George, Governor of the Bank of England, due on 8 May.
Most major lenders said yesterday they did not intend to cut their rates, which at present stand at about 7.25 per cent, at least pounds 47 more a month on a pounds 60,000 endowment mortgage than Nationwide.
Abbey National said: "We have no intention to move. We have already responded to the [official] base rate cut [to 6 per cent] when it was made last month."
Halifax, Woolwich, Barclays Bank and Alliance & Leicester also said they had no plans at present to follow suit.
Cheltenham & Gloucester, which was taken over by Lloyds Bank last year, will not cut the cost of its home loans below the 6.95 per cent it intends charging its 600,000 borrowers from 1 June, unless other big lenders do so first.
Nationwide's decision was hailed by experts as a further underpinning of the housing market's fragile recovery.
Don Smith, UK economist at HSBC Midland, said it "underlines the depth of competition there is in the mortgage market, and that can only be good for the housing market".
A new survey by TSB showed the cost of buying a home is the lowest for 18 years. A typical buyer now pays pounds 25.70 towards a mortgage out of every pounds 100 of take-home pay. Last summer, the amount was more than pounds 30.
In February, Nationwide launched its first strike in the price war between the societies, when it gave its 7 million members members pounds 200m in annual profits.
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The last time rates were this low...
n The average house cost pounds 3,820, and the average weekly wage was around pounds 16.
n The Rolling Stones had three No 1 singles while Roger Moore and Patrick McGoohan were the highest paid British actors on pounds 2,000 a week.
n Ian Brady and Myra Hindley were charged with murder, and the death penalty was abolished
n A two-week package holiday to the Costa del Sol would cost from pounds 66 and to Greece from pounds 93.
n British Rail published plans to cut the rail service in half, following the Beeching Report.Reuse content