Show begins at the home loans' circus

"ROLL UP, roll up, get your mortgage here." The market to sell home loans is now every bit as cut-throat as those for soap-powder and baked beans, with a plethora of offers including discounts and cash-backs.

The reason for this cut-throat mortgage war, which offers the potential for some excellent deals, is threefold.

First, there is the deregulation of the mortgage market, once the cosy preserve of the country's teeming mass of mutually owned building societies and a few big banks. This means virtually any financial institution can now offer a loan to would-be home-owners.

Second, there is the fact that, without doubt, the mortgage market is slowing down. New borrowers are rarer than even six months ago, while a greater slice of lending is used for re-mortgaging.

The third factor is the continuing battle between current and former building societies to be seen as the borrowers' best friend. The recent demutualisation struggle at the Nationwide is a case in point: to win the vote in favour of mutual status, the society had to show that it could deliver a vastly better deal to savers and borrowers. So Nationwide allowed the gap between its mortgage rate and that of other banks to widen substantially - though it moved to narrow it again once the ballot went in its favour.

But how competitive are building societies relative to banks and other lenders? They claim that, unlike banks or the newly converted societies such as the Halifax, Woolwich and Alliance & Leicester, which have to pay dividends to shareholders, they can keep rates low because of their mutual status.

Today, societies such as the Penrith and Scarborough can offer variable rates 1 per cent lower than the plcs, even if some have specialist direct sale mortgage subsidiaries with keener rates than their parents.

Recent figures from the Bank of England show the average mutual building society loan rate at 8.38 per cent compared with 8.95 per cent from a bank. Since the last base-rate reduction, these rates have now come down by about 0.25 per cent - but building societies have cut their rates as much as the banks. On a pounds 50,000 mortgage, this can mean saving about pounds 25 a month.

In addition, Pam O'Keeffe, at the Building Societies Association, says: "Local societies tend to have a better understanding of local economic conditions, and understand their customers' ability to service their loans far better."

Mutuals point to the market share of converted lenders such as Woolwich and Halifax, whose share of new loans, net of redemptions, has shrunk dramatically over the last year.

The efforts of Nationwide and Bradford & Bingley to demonstrate the benefits of mutuality have forced converted societies and banks to find ways of appealing to customers other than the normal standard variable-interest rate.

Converted societies, such as the Halifax, say the real marketplace today is for fixed, capped and discounted mortgages - which now represent almost half of new loans. Halifax recently dipped its toe in that market by cutting its fixed and discounted rates by up to 0.5 per cent - though some allege its previous rates were so uncompetitive.

Direct providers, also able to borrow cheap long-term funds from the money markets, have an even greater cost advantage - they needn't support a branch network.

For example, Kleinwort Benson's current account mortgage charges a variable rate of just 8.2 per cent, Legal & General's Flexible Reserve Loan is priced at 7.95 per cent. Moreover, both calculate interest on a daily basis rather than annually, making the effective cost of their loans even cheaper. First Active, another provider, charges 8.49 per cent, though this is currently linked to a 0.75 per cent discount for new borrowers.

Ian Giles, marketing director at First Active, says: "I can understand the argument over mutuality, but it's not something I share. Our company, for instance, was owned by a Scandinavian bank. Then we were bought by an Irish building society which is about to float on the stockmarket. To my mind, the key is not whether you are a mutual but whether you are prepared to innovate and come up with the right products."

Brokers, who can sometimes negotiate with lenders, will sometimes offer excellent deals. London-based Chase De Vere Mortgage Management is presently offering a 5.95 per cent fixed rate deal with no compulsory insurance, no restrictions on payment methods and no redemption penalty overhang.

Simon Tyler, managing director of Chase de Vere, counters suggestions that variable rates may well fall below this rate in the next 18 months: "The last five-year period in which variable rates averaged less than this was 1956-1960, when they averaged 5.86 per cent. So unless you had a mortgage that started 42 years ago, you will not have seen a cheaper five-year period."

However, Pam O'Keeffe, the BSA's spokeswoman, says: "At some point most people will end up paying a standard variable rate. We believe they will see the advantages of borrowing from a building society."

Unless they get swamped first by telephone-based lenders, who are expected to grab a far bigger slice of the market in the next 10 years.

`The Independent' is offering a free 36-page Guide to Flexible Mortgages, with tips on all aspects of home loans, including how much you can borrow, how to repay, and a list of useful names and telephone numbers. For your copy of the guide, sponsored by First Active, call 0800 550551 or fill in the coupon on page 5