It's a good time to have a mortgage, or, more precisely, to be looking for one. Competition between the financial institutions has now escalated to a full-scale price war since the arrival of the Bank of Scotland last month with its 3.99 per cent variable rate mortgage.

But it's certainly not a good time to be a financial institution selling mortgages in the Irish market, particularly if mortgages are a major part of business.

And the danger for all the financial institutions is that the latest development in the mortgages market - the arrival of a foreign competitor selling at well below existing prices and using technology to keep down costs and ensure that its new business is profitable - could be just the start of price wars involving a number of financial products.

Areas likely to be targeted by low-cost producers/sellers include the savings market, credit cards and personal loans.

Already Internet-based banks have started to attack traditional savings markets internationally, offering above-market interest rates on savings through passing on the costs saved by not having a branch structure.

The booming Irish economy and the European single currency together with the relatively low levels of interest available on savings are expected to attract new competitors into this market. While the savings-and-investment market is seen as more difficult to break into without an established presence than the lending market, this will not protect existing players indefinitely.

The credit-card market has already been attacked by the US bank, MBNA. Attracted in by what it saw as a booming economy where the credit-card market was not very competitive and was dominated by the two big banks, it entered the sector in 1997. It offered a lower interest rate than the players at the time and sold by telephone and post. It now reckons it has 6 to 7 per cent of the market and is targeting further growth. However, despite MBNA's arrival interest charged on unpaid credit-card balances remains relatively high and offers scope for new competitors to enter the market.

Interest rates are high too in the personal loan market where new competitors with low cost structures could hit the profits of the financial institutions by cherrypicking business from them.

As most of the financial institutions cut their mortgage rates to try to hold on to existing customers and to attract new mortgage business the consumer is benefiting.

Before Bank of Scotland's arrival, the lowest variable rate available in the market was the 4.85 per cent rate from the mutual building society, EBS. Now Bank of Ireland is offering the lowest variable rate at 3.95 per cent, just under 0.9 of a percentage point less.

Since there was very little on offer at less than 5 per cent, the savings for most mortgage holders will be considerably more than a cut of one percentage point. AIB's cut from a rate of 5.25 per cent to 3.99 per cent - 1.26 percentage points - will mean a saving of £69 (€87.61) per month on a 20-year £100,000 mortgage.

Mortgage holders on fixed interest rates will not be able to benefit from the lower interest-rate environment until their fixed term expires. And one institution, First Active, reacted by stating that existing borrowers will continue to pay the higher 5.25 per cent rate for the moment while new borrowers are being enticed in with an "introductory" offer of a variable rate of 3.99 per cent for the first year.

The price war is great news for house buyers in a market where financial institutions have been earning higher margins (profits) on mortgage business than their counterparts in Britain and Europe.

But some caution is advised. Mortgages are long-term products - most people take out a mortgage for a term of 15 or 20 years. And variable interest rates go up as well as down. So mortgage holders need to consider where the market is going not just in the short term but in the medium to longer term - in other words what is the likely outcome of the current price war.

Issues such as how many institutions will be left in the mortgage market, whether the remaining institutions will continue to compete or will effectively reach broad "agreement" on market rates, where control of these institutions rests and whether the supply of funds could be limited by events in their home markets, should be considered.

Competition is almost always good for consumers in the short term. But the longer term impact is not always as clearcut. If market players continue to compete then consumers should continue to benefit - that is what has happened in the air transport and telecommunications markets.

However, if competition pushes out some of the smaller, more competitive and innovative players, and, the market becomes dominated either by institutions who effectively agree to carve it up between themselves, or, by institutions for whom the Irish market is only a tiny part of their business, then consumers could suffer in the longer term. And competition can be bad for employees if institutions decide to react by cutting costs so that they can cut prices.

But it is worth noting that once a market is opened up to external competition and consumers became more price sensitive and see the advantages of shopping around, it could be hard to put the competition genie back into the bottle.

Intensifying competition is now the name of the game in the financial services sector. It is being driven by the globalisation of industry and services, the possibilities offered by new technologies and the advent of the euro.

And as Irish institutions have been forced to cut mortgage rates in response to competition from a foreign supplier using new technology, the question is how long will it be before other profitable areas of the Irish banking market come under attack?

Margins or profits - the difference between the cost of funds to the institutions and the return they earn from lending out those funds - in the Irish mortgage market have been higher for some time than those in Britain and European markets.

The financial institutions have argued that they could not fully pass on the reductions in wholesale interest rates to customers because then they would have to cut the already low rates paid to savers. At the same time their profits continued to rise. The strategic mistake the institutions made was not recognising that the high profits available in the Irish mortgage market were bound to attract new mortgage providers sooner or later.

This has now happened. Bank of Scotland was drawn by the high profit potential of the business. Because of its size and financial strength, Bank of Scotland can borrow at relatively cheap rates in wholesale money markets, keeping its cost of funds low. At the same time it is coming into the Irish market not with a structure of branches but selling on the telephone, keeping its processing and distribution costs tight. Thus the bank was able to offer a very attractively priced mortgage product. There is little doubt now but that the Irish financial institutions should have moved to lower rates much sooner - rates in the euro zone are now apparently on the way up again. They appear to have taken short-term profits at the expense of protecting their markets in the medium to long term.

But for some institutions the negative impact on profits of cutting mortgage rates is more acute than others. It is particularly difficult for what are effectively two-product institutions - those selling mortgages and funding much of their lending out of the deposits or savings of customers. The mutuals, EBS and Irish Nationwide, would fall into this category while the converted mutual First Active could also be included.

Traditionally, any reduction in mortgage rates was at least matched by a reduction in deposit rates, so profit margins remained intact or even improved.

Now many deposit rates have fallen so low that there is little scope for further cuts. But there should still be plenty of scope to cut mortgage rates given the wide spread between mortgage and deposit rates, though the additional cost to the institutions would come off profits.

In addition, most institutions have the option of funding from the inter-bank market where the official inter-bank rate of 2.5 per cent is still 1.45 per cent below the lowest of the new variable mortgage rates. The additional cost over cheaper deposit rates would have to come out of profits.

Alternatively the institutions could decide to meet the additional funding costs by reducing operating costs. Cost-income ratios are relatively high at many Irish financial institutions, making it difficult to compete effectively with low-cost suppliers. Finding new ways of doing business and using technology more effectively will become increasingly important as competition intensifies in different product areas.

Another alternative is increasing the volume of mortgages sold: when margins are smaller, an institution could protect profits by selling more products - a margin of 10p on 1,000 products would generate the same £100 profit as a 20p margin on 500 products. But this strategy should further increase competition and could put smaller and more vulnerable players out of the market.

The negative impact on profits of the mortgage war will be directly related to the size of the institution's mortgage business in proportion to its total lending business.

Research by Mr Oliver O'Shea, banking analyst at Goodbody Stockbrokers shows that pre-tax profits at EBS would fall by 63 per cent to €29 million (£23 million) if the building society reduced all its variable mortgage rates by 1.25 percentage points. At Irish Nationwide, profits would fall by 25 per cent to €32 million. At the publicly quoted First Active profits would drop by 34 per cent to €44 million while at the banking division of Irish Life and Permanent profits would be 29 per cent lower at €85 million.

But at Bank of Ireland and AIB, which have a wide spread of business and earnings from foreign markets, profits would be just 3 and 2 per cent lower respectively.

Responding to the arrival of the Bank of Scotland, the banks are now taking defensive action. Classic competition theory would indicate that swift retaliation was the right course once Bank of Scotland entered the market - aiming to discourage other potential entrants from following its example. Whether the retaliation has been swift or sharp enough is debatable.

A more effective strategy would have been to have ensured that competitors were not enticed into the market. This could have been achieved by offering customers the lowest possible rates, thus ensuring their loyalty and making it very expensive for any new entrant to take a slice of the market.

But it looks as if the financial institutions put short-term profits ahead of any other strategy with the likely result that a good slice of their business is now under threat.

The good news for bank customers is that the opening up of the financial services market could mean not just cheaper mortgages but better value on a range of financial products.