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Is Nationwide out for the discount?

Nationwide&#39s decision to drop discounted mortgages from its product range has sent sales on a downward spiral which it may struggle to recover from, claim many IFAs.

Charcol, London & Country and Savills Private Finance are among leading mortgage IFAs reporting plummeting sales for the UK&#39s biggest building society following the shift in its new business market strategy.

So significant is the collapse in sales that London & Country has suggested that Nationwide may be forced to reintroduce discounted products to its range within six months.

Although the society has brushed aside the suggestion, the impression remains in the industry that Nationwide is taking a big gamble.

Nationwide has been the main protagonist in the mortgage price war which it sparked in February by accusing lenders of ripping off existing borrowers to subsidise cheap deals for new customers. The outburst was accompanied by the introduction of a base mortgage rate for all borrowers which significantly undercut its variable rate.

The new base rate, designed to tempt the existing borrowers of rival lenders to remortgage to Nationwide,is being subsidised by the withdrawal of loss-leading discount mortgages.

Nationwide is banking on its ability to coax borrowers on variable rates away from their current lender to remortgage with the society. Its decision to pick a high-profile fight with rivals such as Halifax is part of a strategy to attract maximum publicity to its proposition.

Senior press officer Steve Blore says: “Our success will be based on delivering the message that existing borrowers can get a better deal elsewhere, it&#39s something we really want to drive home.”

The high-street banks, which tend to be have the highest variable rates, have long relied on the inertia of borrowers to be able to maintain their expensive rates. This stagnation allows lenders to offer new borrowers big discounts on which providers take a loss for several years.

IFAs are sceptical about the ability of Nationwide to reverse this trend and point out that the society was until recently as guilty of the practice as any other lender.

Chase de Vere Mortgage Management managing director Simon Tyler says: “It is a very brave move but it flies in the face of current trends in the mortgage market. I simply cannot see how they can compete.”

Nationwide will have a major problem on its hands if it fails to generate high enough levels of remortgaging to counteract its downturn in mortgage sales. As increasing numbers of the society&#39s borrowers fall off its books as they complete their mortgage term, Nationwide will be unable to replace them with new customers.

The society points to figures from the Council of Mortgage Lenders showing remortgaging on the increase to explain its confidence in the move.

But although overall levels of remortgaging may continue to rise, it is not necessarily Nationwide which will reap the benefits. Abbey National, Britannic Money and Woolwich are just three examples of lenders which currently offer cheaper deals.

London & Country mortgage specialist David Hollingworth says: “I would not say remortgaging is going to go Nationwide&#39s way, there are better deals out there. If you have not got a particularly competitive new mortgage rate, which they haven&#39t, or the best remortgage deal, then you really are struggling.”

Nationwide claims that part of the motivation behind the move is its dedication to providing the fairest deals to borrowers, something it is basing its marketing strategy around.

RJ Temple communications manager Liz Walkington says this stance conflicts with the reality for remortgaging borrowers, who are considered a safe bet with lenders as they are often borrowing less and generally have solid payment histories.

She says: “Nationwide is concentrating on improving its mortgage book so it really ought to be offering much better deals. It is a lot of hassle for people to remortgage. Borrowers should not be put through that unless they are getting genuinely good rates.”

Nationwide could also face problems retaining its existing borrowers, for whom the society&#39s base mortgage rate was introduced.

Although reasonably competitive, the rate is only likely to satisfy borrowers loath to remortgage but will not be low enough to retain the business of an existing borrower seeking advice from an IFA.

Regency Financial Management partner Bryn Walker says: “If an existing Nationwide borrower came in for advice, I would recommend the client look elsewhere to get a better deal. They have made a bizarre move. I would love to know who carried out the risk analysis for them.”

By offering no discount mortgages, Walker sees Nationwide also losing the custom of borrowers who use best-rate tables and mortgage sourcing systems as a frame of reference. These are often popu-lated solely with mortgages with heavy discounts as the ranking of the tables is based on initial headline rates.

Nationwide sees its move as part of a long-term strategy and says it expected to lose its share of new business for the first few months.

But it believes that the policy will be a success over time and it expects other lenders to follow suit eventually and drop their discounts.

Savills Private Finance director Mark Harris says: “It is awfully arrogant. I think they have gone too far one way, when they could have retained some discounts. What they have done is unsustainable. I think we could well see a U-turn.”

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