An all-out war between Britain's mortgage lenders broke out yesterday after Abbey National and Northern Rock announced they were cutting the cost of their loans to 7.99 per cent.
The cut means interest rates for millions of borrowers have almost fallen back to the all-time low they reached nearly two years ago. But both lenders said the rates paid to savers might have to fall as a result.
Other building societies said yesterday they were watching their rivals' move, which shaves at least pounds 13 off the monthly cost of a pounds 50,000 loan.
Privately, both Halifax and Nationwide, the two top building societies with about 3.5 million borrowers between them, said they might follow suit as early as next week.
Nearly 400,000 home-buyers with Cheltenham & Gloucester could gain almost by default. The C&G, now part of Lloyds Bank, pledged recently that its own rate would be 0.25 per cent cheaper than its main competitors.
The Abbey and Northern Rock's decision to cut rates came amid continuing signs of gloom in the housing market.
Figures from Nationwide showed house prices remained unchanged in August and were a further 0.9 per cent down on the same time last year.
The Bank of England's mortgage figures showed lending plummeted more than 40 per cent in July compared to the same time last year, down from more than pounds 1.6bn to just pounds 932m.
Chris Toner, managing director of Abbey National's retail division, said: "We are demonstrating our long-term commitment to good value for all. With rates now looking as if they have peaked we hope [this] will help restore a feelgood factor to the housing market."
Philip Williamson, Nationwide's divisional director, said he believed the number of house sales was likely to fall further in months to come. But he remained "quietly optimistic" about a possible market revival next year.
The decision by Abbey National and Northern Rock to cut their rates is the latest twist in a relentless mortgage war between major lenders. It has been exacerbated in the past 18 months by the slide in both house prices and purchases.
Lenders have reacted to the absence of new home-buyers by repeatedly trying to poach each others' existing borrowers.
The usual tactic has been to offer "golden handcuffs" to potential borrowers - huge discounts, cash-back mortgages and low fixed rates. In return, if borrowers decide to switch their loans to another lender within the first few years of signing on the dotted line, they face heavy exit penalties. Big profits for most societies, the product of low repossession rates in recent years, have helped pay for these inducements.
In recent months Abbey National has been especially vulnerable to other lenders' poaching tactics. It was the first to ditch its mutual status in 1989.
Unlike many societies, including Halifax, Leeds, Alliance & Leicester and C&G, where borrowers and savers have stayed put in the hope of sharing in the big pay-outs as societies abandon mutal status and become public companies, its own home-buyers could be won over by other lenders' better offers.
Simon Tyler, a director at Chase de Vere, one of Britain's leading mortgage brokers, said: "Abbey are presenting this as if it is aimed at kickstarting the housing market. The reality is that they are moving to protect their own share of it in the face of increasing competition."
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