Can it really get lower than this?

You've had your lot now! That seemed to be the message from the biggest mortgage lenders this week after they failed to pass on the benefits of the full quarter point interest rate cut to their borrowers.

The Halifax and Abbey National announced within minutes of each other that they were cutting their standard mortgage rates by just 0.1 per cent to 6.85 per cent, leaving many home-owners feeling a tad short-changed. Northern Rock and Cheltenham & Gloucester followed their (remarkably well-choreographed) lead with cuts of 0.1 per cent and 0.14 per cent respectively, while many other lenders have yet to make any announcement at all.

Significantly, the Halifax's announcement was accompanied by a warning to its millions of borrowers that the party appears to be over and they should not expect any more mortgage rate cuts.

"Any further reductions in base rates may not result in lower mortgage rates," says Mike Ellis, retail financial services director.

But can they really mean that or are they just bluffing? And doesn't such a remark smack just a little of arrogance? For it effectively says to the Bank of England: "It doesn't matter how far you push base rates down - we're staying put."

History says that mortgage rates can drop below the 6.85 per cent level where Halifax and Abbey National are currently holding the line. As the graphic below shows, throughout the 1950s mortgage rates were never higher than 6.1 per cent and were as low as 4.2 per cent in 1950-51. It was not until 1966 that rates matched the levels of today.

Many experts believe that, contrary to what the Halifax might suggest, we will see lower standard variable mortgage rates because, faced by ever-increasing competition from new entrants, the big high street players simply won't be able to stand still.

"I think market forces might force them to do it [cut mortgage rates further], otherwise they are going to continue to lose market share," says Jim Spowart at Standard Life Bank, one of the new low-cost providers causing the giants real pain.

Since January, Standard Life Bank has received ?3.2 billion worth of applications for mortgages, and has taken more than a third of its remortgage business from the Halifax and Abbey National. One of the principal attractions is the low standard variable mortgage rate - 6.05 per cent, with a 1.5 per cent discount for the first six months.

Phillip Cartwright at mortgage brokers London & Country agrees with Mr Spowart's prediction. "They will drop mortgage rates further. They are going to go lower than 6.85 per cent."

The banks defended the decision to pass on only part of last week's base rate cut by saying that they need to protect their savers, and pointing out that mortgage rates are now at their lowest level since the mid-sixties.

"Rapidly falling rates are obviously good news for borrowers but we are aware that they have a great impact on our savers who outnumber borrowers by seven to one. Many of our savers rely on their income to live off," says Ambrose McGinn, Abbey's retail product director.

But comments about concern for savers ring a little hollow considering that the average instant-access account savings rate has fallen so far that it is now well below the annual rate of inflation.

Even people prepared to put away several thousand pounds and give up instant access to their cash are getting a raw deal from many high street players - the average 90-day account rate for someone with ?5,000 invested is only 3.16 per cent gross. Take the tax away and you are left with 2.53 per cent - only a fraction above inflation at 2.1 per cent.

Furthermore, when interest rates are going up, you don't see the rates of interest paid to savers being raised at the same time as base rates rise - there is often a delay of a month or so. And often the rise is not passed on in full.

"When interest rates go up, the institutions seem to give away as little as they possibly can, so when it goes down, this argument that 'we are thinking of our savers' sounds very weak," says Stuart Cliffe, chief executive of the National Association of Bank Customers. "It's the bottom line they are thinking of, not the saver."

If the high-street lenders are to fend off the new call-centre based entrants, with their spanking new systems and low overheads, the banking behemoths are going to have to drastically reduce costs and become a lot more nimble.

A report this week from Deloitte Consulting predicted that up to a third of the UK's 11,000 traditional high street branches will disappear by 2005 as consumers become increasingly turned on to telephone and online banking.

Not one to miss a trick, Richard Branson's Virgin Direct was quick to cut its borrowing rate by the full 0.25 per cent to 6.45 per cent while keeping its deposit account savings rate unchanged at 5.75 per cent. It says that for millions of people with both savings and a home loan, the major lenders' logic is fundamentally flawed.

A taxpayer would need to have more than ?6,000 in a deposit account to lose out by just ?1 per month as a result of a 0.25 per cent cut in interest rates. Yet if he or she is paying interest on a ?50,000 mortgage at the same time, they stand to lose out on a potential reduction of ?10.41 per month on the cost of their loan if the rate cut is not passed on.

Effectively, home owners with both a mortgage and savings are being asked to forfeit a lot to save a little, says Virgin Direct chief executive Rowan Gormley. "With average high street savings rates often running at 3-4 per cent less than mortgage rates, it is clear that many companies are actually putting margins rather than savers first because deep-seated inefficiencies and cost burdens require them to do so."

Asked why Abbey National wasn't able to reduce mortgage rates by the full amount while keeping savings rates on hold, as Virgin Direct had done, Ambrose McGinn replied: "They have handfuls of mortgage customers - I've got two million. I have to take them into account but I also have to take into account 12 million savers. Virgin is a relatively new start-up business - they can afford to be quite unique in their pricing approach."

The Council of Mortgage Lenders argues that the Halifax, Abbey et al weren't really denying borrowers very much because interest rates may now have reached the bottom of their cycle anyway.

But this isn't an opinion shared by some of the other experts. Analysts at investment bank Salomon Smith Barney reckon there are more base rate cuts ahead. "We still expect base rates to fall to about 4.5 per cent late this year or in early 2000. At this stage there seems to be a slightly better than even chance that rates will fall again in May," it said.

One aspect of this week's shenanigans highlighted by commentators was the fact that the banks will have to spend an awful lot of money implementing what is a very small rate cut. "It's expensive for them to make just a 0.1 per cent cut," says Siobhan Hotten at mortgage brokers John Charcol. "Administratively, every time they do it, it costs them a fortune - they have to write to everybody, they have to reset all their systems."

House-hunters and re-mortgagers who take the view that variable mortgage rates have indeed hit bottom might do well to consider some of the fixed-rate loans on the market. There are user-friendly two and three-year fixed rates available at around 4.99 per cent.