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Has the big gun shot itself in the foot?

The big high-street lenders will be watching Nationwide Building Society&#39s sales figures over the coming months to see if its flat-rate approach is winning and keeping business. But some commentators are predicting Nationwide will have to make an embarrassing U-turn and start offering front-end discounts to new borrowers, possibly before the end of the year.

Nationwide achieved maximum exposure for its interest rate cut last month, when it was credited with firing the opening shots in a mortgage war. That Halifax responded with rate cuts and detailed product changes the next day suggests both parties had been working simultaneously on more competitive products for some weeks.

On February 20, Nationwide announced a cut in its standard variable rate for new and existing borrowers to 6.49 per cent from 7.09 per cent.

The following day, Halifax hit back by cutting its SVR to 6.75 per cent from 7.5 per cent for all borrowers although they have to contact Halifax to get the reduction. Halifax also offered an across the board change to payment of interest on a daily basis.

The cuts led to a spat between Nationwide chief executive Brian Davis and his Halifax counterpart James Crosby, with Davis accusing Halifax of making misleading claims that its rates were cheaper.

Both Nationwide and Halifax knew their products had to change to meet the challenge of the new mortgage market, which has undergone fundamental change in the last two years. It has never been easier to remortgage and consumers are getting used to shopping around for the best discounted rate every couple of years.

The growth in the number of smaller lenders offering heavily discounted rates, with or without tie-ins, daily interest, flexible and current account features, means the market for homeloans has never been more competitive.

The Council of Mortgage Lenders predicts that a third of all mortgages taken out this year will be remortgages. The flow of this business is likely to be from the high-street giants to more sophisticated and competitive products. It is hard to imagine consumers already used to lower rates and hefty discounts going back to the big lenders.

Nationwide&#39s response to this new environment is to differentiate itself from the rest of the market on the grounds of mutuality. But the strategy is a risky one which could see it losing out in the battle for new business.

While existing borrowers will appreciate the principle of refusing to subsidise new borrowers at their expense, will consumers shopping around in the high street shun Nationwide when they realise they can start their mortgage at a lower rate with another lender? When lower monthly payments are placed in front of the cash-strapped first-time buyer, the mutuality proposition may seem academic.

Nationwide spokeswoman Jennifer Stoddart says: “No one else has done what we have done. We are putting the members first. It has taken a mutual to do this.

“We are happy to be compared. There are a lot of deals out there and we say take them. We think these deals will not last for ever as they are unsustainable. The more people go for these front-line competitive rates, the more it will eat into the lenders&#39 profits. We suggest people do shop around but you know that if you come to us you will get a good long-term deal.”

Moneyfacts mortgage editor Melanie Stewart says: “Nationwide has revived the mortgage business. Halifax jumped on the bandwagon and the others have followed. A lot of people know and trust the Nationwide brand and may be attracted by its mutual status.”

It is in the area of retaining existing business that Nationwide has most to lose.

Halifax spokesman Mark Hemingway says: “It appears Nationwide has shut up shop for new business. It has dropped out of best-buy tables. Its inflexibility on front-end discounts will have an impact on its ability to get new business. We have looked at our existing business but we are also targeting new business. We have 10 per cent net lending but we want to increase that to 15 per cent.

“The Nationwide&#39s single rate goes back to the building society cartel culture of the 1980s. That is not good for competition or the consumer.”

Charcol senior technical manager Ray Boulger says there is no doubt that Nationwide&#39s new business will fall, particularly through intermediaries. He says: “If you look at credit cards, competitive pricing of initial business is the name of the game. If you believe you can do away with new business pricing for mortgages then why not do it for credit cards? But Nationwide is still offering six-month discounts for credit cards.”

But Boulger accepts Nationwide may not want bargain-seeking consumers. He says: “There is an argument that the rate tarts and serial remortgagees are the ones lenders will never make any money out of. But you have to offer something to new borrowers. Nationwide abandoned mortgage indemnity guarantees and it is now quite competitive in the 90 to 95 per cent loan to value bracket. Brokers will pick up on that over the next few months.”

Mortgageforce managing director Robert Clifford sees the move in a more positive light. He says: “I think it is a sweet tactic. In the consumer&#39s eyes, dual pricing seems unfair. They may get some new customers on the strength of mutuality. Nationwide has scored by differentiating itself from the rest of the big lenders, which will enable it to sustain but perhaps not increase its market share.”

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