Nationwide pays penalty for cheap loans

Nationwide, Britain's biggest building society, has paid the penalty for moving all of its mortgage customers on to cheaper loans with a 30 per cent slump in annual profits.

Nationwide, Britain's biggest building society, has paid the penalty for moving all of its mortgage customers on to cheaper loans with a 30 per cent slump in annual profits.

The society took a £90m hit when it moved 400,000 customers to its lower lending rate. This followed a decision by the financial ombudsman that a couple with a discount mortgage tied to the lender's higher rate should be moved.

While the ruling was specific to the couple's complaint, Nationwide decided to move all customers with discount mortgages to the lower rate.

The lender also suffered from having to write off £41m on investments in bonds, including a loss from a "modest exposure" to bombed-out Marconi. Nationwide had to write down £6m on bond investments last year.

The two events pushed pre-tax profits down by one third to £325.7m in the 12 months to April. Nevertheless, Nationwide managed to recover some of its lost ground in the mortgage market in the second half, to capture 3 per cent of all new home loans for the year.

This was still down dramatically on Nationwide's share of the existing mortgage market, which stands at 8.5 per cent.

Nationwide teetered on the brink of going into negative net lending, only grabbing 0.2 per cent of new loans in the first six months. This was when it introduced its strategy of ending short-term deals – usually offered to new customers – to give existing borrowers a fairer deal.

Brokers deserted Nationwide when it embarked on the policy in favour of attractive short-term deals from other lenders. Since then Nationwide brought back many special offers to bolster sales, but made them available to all customers.

Nationwide is still plagued by carpetbaggers who want to convert it to a bank, and faces an attempt by two members to get themselves elected onto the board at its agm at the end of the month.

Philip Williamson, Nationwide's chief executive since January, struck a robust defence of mutuality, saying: "I believe the time of the carpet-bagger is now over. People in England need another bank like David Beckham needs another foot injury." As a mutual, it has been able to sacrifice profits in order to promote strategies such as its "fair mortgage policy". The move has also reduced the windfalls that carpetbaggers would receive.

Nationwide's customer base grew by 300,000 to 10.7m. Mr Williamson said: "I would be disappointed if we don't have in excess of 11 million customers by this time next year."

He added his voice to the growing expectation that the housing market would see a gradual slow towards the end of 2002, but said that there is no evidence of a speculative property bubble. Nationwide's housing index predicts house price growth of 10 per cent this year.