Mortgage war set to escalate

DIANE COYLE

Economics Correspondent

An escalation of the mortgage war is expected early next week when Bristol & West and Skipton are expected to follow the Nationwide and cut home loan rates.

Other mortgage lenders said they would not follow suit but analysts yesterday predicted that they could be forced to fall into line.

David Charlton, a spokesman for the Skipton building society, said: ''Societies supporting mutuality will see the Nationwide's step as the new benchmark. It is almost inevitable that the vast majority of mutuals will follow.'' This would happen within a very short time, he said.

A spokeswoman for the Bristol & West said: ''We are committed to remaining competitive. We will be reviewing our rates in the light of the Nationwide's move.''

Other societies believed to be considering a move themselves include the Bradford & Bingley, Yorkshire and Northern Rock.

However, few are expected to match the scale of the Nationwide's reduction in its rate for existing borrowers to 6.99 per cent from 7.44 per cent. Other societies have already introduced different types of 'loyalty bonus', such as the Skipton's free unemployment insurance for its borrowers.

Lenders giving up their mutual status said they would not join a round of mortgage rate cuts for the time being. However, Rob Thomas, an analyst at investment bank UBS, predicted: ''In the long run they will be forced to follow suit. They would lose market share if they did not, although it does depend how much new business lenders like the Nationwide can gain.''

Mr Thomas said the 14 largest lenders could cut up to 1 per cent from their mortgage rates without reducing profits below the level needed to keep capital at adequate levels. There were very few mutual societies which could not afford to cut borrowing costs, he said.

The margin between mortgage rates and base rates has been around 2 per cent for more than three years, an unusually long time for it to remain so high. Its more normal level during the past 25 years has been 1-1.5 per cent.

Other lenders insisted yesterday that the mortgage cut by Nationwide, headed by the chief executive Brian Davis, would be unsustainable. Charles Toner, manager director of the Abbey National's retail division, said: ''They can not keep up this narrowing in their margin and still keep sufficient capital to grow their business. It is a short term marketing initiative.''

Mr Toner predicted that the mutuals, which will have a market share of only 25 per cent a year from now, would not be able to dictate the pace on mortgage rates.

Abbey National is expected to report 1995 profits of about pounds 1bn on Monday, up from pounds 932m in 1994, and its dividend for the year could climb from 17.8 pence to as much as 23 pence. The Nationwide's announcement on Thursday hit Abbey National's share price, although it recovered most of the loss yesterday.

Gary Marsh of the Halifax said its reaction would be to wait and see. ''This is just another salvo in the mortgage war which has been going on for some time. We will see what happens in the market,'' he said.

He said that although the Halifax would have to pay a dividend after its conversion, savers and borrowers would reap the benefits of greater efficiency.

The Halifax announced the appointment of SBC Warburg and Merrill Lynch as joint brokers for its stock market listing. This is expected to take place next year.