Home loans at Euro rate

Nationwide Building Society could start a revolution in mortgages by launching the first sterling home loan linked to European interest rates. The mortgage will be priced at 1.75 per cent above the European Central Bank rate for 10 years, giving a current variable rate of 4.75 per cent.

There is also a discount of 1 per cent in the first year. This compares with a typical United Kingdom bank standard variable mortgage rate of 6.95 per cent.

The move indicates that with consumers clamouring to take advantage of lower European interest rates, financial services companies are not prepared to sit back and wait for the UK to make a decision about joining the single currency before launching products.

Other banks and building societies will be watching closely to see how the new mortgage fares. 'It will certainly get other lenders thinking. It is clearly innovative,' said Ray Boulger at mortgage brokers John Charcol.

A handful of lenders, notably Abbey National and Barclays, have already launched euro mortgages this year, allowing people to pay interest rates of around 4.6 per cent. However, these are niche products available only to the small band of Britons paid in euros.

As the Nationwide mortgage will operate in sterling, there is no exchange rate risk, as is the case with foreign currency mortgages. The catch is early redemption penalties for the full 10 years. A customer wanting to pay off the loan within the first five years must pay nine months' gross interest, which reduces to six months' interest in years six to eight, and three months' interest in years nine and 10.

The other downside is that if Britain joins the European single currency in, say, 2002, the ECB base rate - currently 3 per cent - will also become our base rate. In that case, a mortgage rate of 1.75 per cent above UK base would not seem nearly such good value, said Patrick Bunton at mortgage brokers London & Country. Also, 10 years is a hell of a long time to sign up for in the current environment.'

Nationwide has called the product the European Tracker Mortgage and will be available via its telephone division from March 24. It is only available to people moving house.

'This will be a completely new type of mortgage product and Nationwide is testing customer reaction with only a limited amount of mortgage funds being made available,' said a spokesman. 'It is designed for those people who believe that European interest rates are, at least for the foreseeable future, going to be lower than UK rates.'

Most analysts expect interest rates in the 'Eurozone' to be lower than British base rates for at least two years.

'On the face of it, you should probably rip [Nationwide's] arm off to get that sort of deal because for the next few years British interest rates are likely to be higher than European rates.

'Then it looks like we will go into Economic and Monetary Union and rates will be the same,' said Adam Cole, UK economist at HSBC.

He warned that the deal could look less attractive in a few years' time.