They voted no to pounds 2,000. Why?

Nationwide's members have said they want to stay mutual. Nic Cicutti asks whether they will be any better off as a result

Swindon has somehow never struck many observers as the happiest of places. They would have been pleasantly surprised earlier this week to see a sizeable proportion of the town's inhabitants walking around with broad smiles on their faces. The cause of this sudden outbreak of joy was the decision by members of Nationwide, whose head office is in Swindon, to overwhelmingly reject moves to demutualise the building society.

In the largest ever ballot for Nationwide's board, members voted by a huge 70-30 majority against a slate of candidates whose avowed aim was to force the society to float. In so doing, members voted themselves out of a potential free share package worth up to pounds 2,000.

Nationwide's members clearly bought the argument that they would benefit more from improved savings and mortgage rates, though not without heavy prodding by staff at branch level, many of whom feared for their jobs if the society became a bank. Hence the smiles on thousands of Swindonian faces.

Will the members' decision prove to have been worthwhile? It depends.

Alan Mudd, sales manager at John Charcol, the UK's largest mortgage broker, says: "Nationwide is the biggest building society and because of that it can offer competitive rates across the board.

"Its standard variable rates are extremely competitive and the society has said it will remain at least 0.25 per cent below the prevailing market rate, though at present it is 0.35 per cent cheaper than its main rivals."

Research by MoneyFacts, the financial information provider, shows that in the past 12 months Nationwide was second in a league table of total interest repayments on a pounds 50,000 standard variable rate mortgage.

Between 1 July 1996 and the end of June this year, repayments on the loan would have totalled pounds 3,398 with Yorkshire Building Society, pounds 3,406 with Nationwide and pounds 3,447 at the Derbyshire.

By contrast, Halifax charged pounds 3,575, about pounds 170 more, while Woolwich and Alliance & Leicester were pounds 180 and pounds 200 costlier than Nationwide respectively.

Mr Mudd adds that Nationwide has one of the best range of first-time buyers' mortgages currently available: "They are extremely flexible and rather than operating a crude earnings multiple, they run an affordability check so that even if the loan one is requesting is over the normal income criteria, the society tends to take a sensible view.

The key question is whether there are many new borrowers who opt for variable rates at present. Mr Mudd points out: "The proportion is extremely low. One of the most noticeable changes of the past few years is that people have become aware of fixed, discounted and cashback mortgages. That is the kind of loan they tend to take out rather than simply opting for a variable rate.

In that scenario, the test is whether the discounted rate is still more competitive than that of its rivals."

At present, our table shows that Nationwide is competitive in that area too. It offers a three-year discount of 1.8 per cent off its variable rate, compared to just 1.2 per cent from Halifax and 1.55 per cent from Cheltenham & Gloucester, now owned by Lloyds Bank. Because its variable rate is cheaper in the first place, there is a double gain for borrowers. A similar picture applies to fixed rates over three years.

Of course, for many people who took out loans earlier than that, variable rates were common and inertia means they gain almost by default, although the size of their mortgages may not be as high as they are today, hence the savings will be smaller.

But many people will find themselves on variable rates at some stage in the mortgage repayment period.

Assuming the first five years of a loan are fixed or discounted to some extent, these figures would suggest that Nationwide's million-strong army of borrowers might make savings of up to pounds 4,000 over the remaining 20 years of the loan compared to its rivals.

The important thing to note is that while Nationwide may be competitive now on the mortgage front, the likelihood is that another lender will always be able to nip in and offer a better deal for a limited period. The test is whether Nationwide can stay the pace over many years, as it claims to be ready to do.

And what of savings rates? Here the picture is muddier. Every financial institution is involved in a bitter battle for savers' money.

The main focus of competition tends to be the savings tables that appear in most newspapers, including this one. It is easy to construct a product which, for a few weeks at least, appears to head the table in that area.

The problem is that within a few weeks another company will come forward to usurp the title and investors are left with little to show for their assiduous study of rates tables.

As our tables show, Nationwide is moderately competitive on the most common savings products. However, it is not the world-beater that it claims to be. Its branch-based instant account is less competitive for deposits of pounds 5,000 than Halifax or the Woolwich, both of which have demutualised. On branch-based 90-day accounts, it lags behind Halifax and Alliance & Leicester.

At the same time, in an environment where interest rates are on the rise, it is likely that at any one point Nationwide will lag behind at least one of its main competitors in respect of some savings accounts.

No doubt Nationwide will argue that the relationship most members have with it is based on having a mortgage but relatively low levels of savings for the first 15 or 20 years. Then once children have grown up and the mortgage is nigh-on paid off, savings can begin to accrue at a far more rapid rate.

Equally, it is worth noting that, as some experts pointed out this week, despite a guarantee to be 0.25 per cent better than its rivals, Nationwide savers with pounds 10,000 are unlikely to match the pounds 1,000 of free shares they might have received from the flotation, even after 40 years. Given that the average savings level is five times smaller than that, it is unlikely that people will gain enough to offset any free shares purely from their savings accounts within their lifetimes.

For members, the reality is still that the main mechanism for keeping their society's rates among the best is to be prepared to switch to a rival if it consistently betters Nationwide's.