The society's 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 mortgage-rate cuts if the Chancellor, Kenneth Clarke, reduces base rates in two weeks time.
He also 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.
More than 6 million Nationwide savers also stand to gain by an immediate 0.25 per cent increase in their savings rates.
Bradford & Bingley and Skipton building societies yesterday strongly welcomed both decisions. John Wriglesworth, a senior manager at Bradford & Bingley, said: "This is like England during World War II. After holding out on our own for so long, America has just joined the war on our side."
Both said they were reviewing their rates and promised announcements within weeks. One expert predicted Skipton may cut its rates below Nationwide.
Cheltenham & Gloucester, the former building society now owned by Lloyds Bank, said it too would be reviewing its rates. C&G has guaranteed to its 600,000 borrowers that it will undercut rates charged by Britain's top five lenders
However, Halifax said yesterday it would not budge on the cost of its home loans. "Mortgage rates are already at their lowest levels for many years and, therefore, a cut is not really justified," David Gilchrist, the society's general manager, said.
Charles Toner, managing director of Abbey National's retail division, said: "We see it as a short-term marketing initiative. We do not believe this latest cut in mortgage rates is justified in the light of current economic conditions."
This was denied by Mr Davis, who said: "We are in a position to sustain this cut in our profits indefinitely."
Rob Thomas, an analyst at Swiss banking group UBS, forecast that despite their initial refusal to do so, all major lenders would have to cut their rates: "The societies can afford to do it. If the banks don't, they will end up losing their borrowers to lenders that do."
Nationwide's broadside, page 17Reuse content