Millions to benefit in home loans war

Rates drop to 6.25% in battle for customers

Millions of house buyers are set to benefit from the cheapest home-loan deals since the Sixties as the escalating price war between lenders led Bradford & Bingley yesterday to cut mortgage rates to a record low of 6.25 per cent.

Its move placed the two biggest lenders, Halifax and Abbey National, under intense pressure to reduce their mortgages rates even further.

Their resolve will be tested by other large and mid-ranking building societies in the next few weeks. Several confirmed yesterday they are preparing to give "loyalty" bonuses to members.

One building society chief, who refused to be named, said: "We will force them to the point where they have to say whose side they are on. Are they into making profits for their existing and future shareholders, or will they defend the interest of their members?"

Both lenders, with 3.2 million borrowers between them, said that after spearheading several price cuts in the past few months they had no intention of dropping their rates this time.

A Halifax spokeswoman said: "We have no plans to cut our rates. Having said that, we would want to remain competitive with the market-place."

Bradford & Bingley's move yesterday followed an earlier rate cut to 6.49 per cent by Direct Line, the telephone-based financial services company.

The society's response lowers the cost of a typical pounds 50,000 interest- only mortgage to pounds 237 a month from March, when the reductions take effect. Direct Line's mortgage will cost pounds 246 a month from mid-February.

Geoffrey Lister, the society's chief executive, said: "We believe the new rate for our 'phone-alone' mortgage is the lowest standard rate anywhere in the country."

The bonus packages on offer from societies, including reductions in loan costs and hikes in savings rates, are part of societies' defence against de-mutualisation or takeovers.

David Charlton, assistant general manager at Skipton Building Society, which led the market with a reduction for its 60,000 borrowers in December, said: "We are preparing a package of measures and it is almost certain that we will be cutting mortgages even further. We have said for some time that we believed there must be a narrowing of the margin between savings and mortgage rates."

Bradford & Bingley last week by cut rates for its 600,000 branch network borrowers to 7.24 per cent. Yesterday's cut is on offer to borrowers who book a mortgage through the society's telephone service.

Nationwide, the second-largest building society, said it too would be offering a bonus package to its 8 million members within weeks. Britannia, another top-10 society, will do so in the spring.

A spokesman at Bristol & West said: "Until recently, we had considered that defending mutuality lay in providing competitive pricing, both in savings and mortgages. We are now considering the issue of loyalty bonuses and will make an announcement as soon as it is appropriate."

Birmingham Midshires said it was also considering a similar package for its 750,000 investors and 160,000 borrowers, although a spokesman was unable to say when a decision might be reached.

But Ken Culley, chief executive at Portman Building Society, argued: "Our defence of mutuality means we try to balance the interests of both savers and borrowers. It is a matter of concern to me that the effects of mortgage-rate reductions are always felt by savers. We believe that borrowers have had a good deal and want to defend our savers, who are seven times as numerous."

The initiative by Direct Line and Bradford & Bingley adds a new dimension to the price war. Their undercutting of traditional lenders is the result of telephone-based operations doing away with costly overheads, including branch networks.

Although still relatively small, telephone lenders are grabbing an increasingly large slice of the market. Direct Line, which has been offering mortgages for less than a year, has already lent about pounds 210m.