Nationwide pays heavy price for bounce back in mortgages

Nationwide, the UK's largest building society, yesterday showed its mortgage lending has bounced back strongly from a historic low last year, which was the result of a controversial decision to scrap discount deals that were typically offered to attract new customers.

Nationwide, the UK's largest building society, yesterday showed its mortgage lending has bounced back strongly from a historic low last year, which was the result of a controversial decision to scrap discount deals that were typically offered to attract new customers.

Nationwide said its share of new lending reached 8 per cent in October, the first time new business has matched its share of outstanding loans since it introduced its "fair deal" policy in March last year.

The building society has achieved the dramatic comeback partly by launching a raft of ultra-competitive fixed rate mortgages for new and existing customers to undercut rivals. The move eroded profits, which fell 25 per cent to £154m.

In the six months after Nationwide's new mortgage strategy, its share of new lending plummeted to 0.2 per cent, prompting speculation it had made a serious strategic blunder in getting rid of discount mortgages for new customers. Nationwide's chief executive at the time, Brian Davis, left the organisation in December.

Philip Williamson, who replaced Mr Davis, insisted the policy had proved to be a success, with Nationwide's new lending standing at 6.8 per cent for the six months to 4 October overall. He predicted that this would be boosted to 8 per cent by the end of the year.

"You can have a fair deal for all. All of our products are available for new and existing customers. This has attracted new customers and also helped us retain far more customers. Before we implemented the strategy we were losing 22 per cent of customers within three months of coming off the discount, now that is 5 per cent," he said.

Nationwide's profits were also hit by its decision earlier this year to abide by the ruling of the financial ombudsman that customers with a discount mortgage should be allowed to have the discount linked to new, lower, lending rates banks and building societies introduced after agreeing these deals. Nationwide moved thousands of customers on to its new rate this year, at a cost of £30m. Most of its rivals only moved customers who actively complained on to their lower rates.

The UK's fourth-largest mortgage provider said it did not expect there to be a dramatic crash in property prices. Mr Williamson said: "Some of the emotional language that has been used is inappropriate, but we do believe there will be a slowdown in price inflation, from 25 per cent this year to about 5 or 6 per cent next year."

So far, the UK's lenders are still seeing signs of strong growth. Nationwide's rival HBOS recently predicted the annual rate of growth this year would be 30 per cent.