THE mortgage war in Britain entered a new phase yesterday with the decision of Nationwide Building Society to cut its headline mortgage rate by 0.25 of a percentage point to 6.74 per cent, the lowest rate since January, 1965.

The move by Nationwide, the UK's second largest building society, was immediately matched by Yorkshire Building Society, making the two societies the cheapest retail lenders in the market.

Nationwide's new rate represents a further challenge from mutual building societies to the major banks and other building societies such as the Halifax, the Alliance & Leicester and the Woolwich, which are in the process of converting into shareholder owned banking businesses.

Mr Brian Davis, chief executive of Nationwide, said the society had lowered its mortgage rate by 0.7 per cent since the beginning of the year compared with much smaller reductions of 0.25 per cent at retail banks and converting building societies. At 6.74 per cent, the new Nationwide rate is significantly lower than the 7.44 per cent mortgage rates of shareholder owned lenders.

Nationwide said it was able to undercut its rivals because it does not have to pay dividends to shareholders and, as such, was sharing the benefits of mutuality with its members.

However, five of the Chancellor of the Exchequer, Mr Kenneth Clarke's six wise persons" yesterday cautioned against further cuts in interest rates. The trend in British rates has little impact on Irish rates, which tend to follow the German lead.

In their latest twice yearly report, Mr Clarke's panel of independent economic advisers welcomed previous base rate reductions, although Prof Martin Weale, of the National Institute of Economic and Social Research, had reservations.

But they added "Most of us do not think that the next move in interest rates should necessarily be downwards."