Fresh competition from the Bank of Scotland means domestic banks and building societies will come under pressure to offer more attractive mortgage interest rates.

From next Monday the Scottish bank is offering to sell the cheapest mortgage deals to Irish consumers through its telephone banking business in Scotland. Those who meet the bank's lending criteria will be offered mortgages at a rate of interest of 3.99 per cent - almost one percentage point below the lowest variable rate available here to existing borrowers. The mortgage rate has an annual percentage rate (APR) of 4.1 per cent. The APR is a better measure of the full cost of a mortgage.

Announcing its arrival yesterday - the first significant move into the market by an overseas player - Bank of Scotland head of mortgages, Mr George White, insisted the low rate of interest was not being introduced as a loss leader to capture market share, but reflected the lower profit margins the bank could sustain.

Bank of Scotland will offer its 3.99 per cent mortgage rate to borrowers seeking a loan equivalent to 80 per cent of the value of their home.

The bank will adhere to the guidelines set down by the Central Bank of Ireland, lending up to 2.5 times of the amount earned by an individual applicant.

Where two people are taking out a mortgage the bank will lend 2.5 times the amount of the main income plus the basic income earned by the second person.

In an innovative move, Bank of Scotland will allow mortgage holders to top up their loan to cover the costs associated with buying a house such as legal fees and stamp duty.

Borrowers can apply for a mortgage through its freefone number 1 800 556 577 which connects customers with Bank of Scotland's direct mortgage sales team in Edinburgh. The freefone number operates between 8 a.m. and 10 p.m. daily and is open at weekends and bank holidays. The bank will also sell its mortgage product through independent mortgage brokers which are members of the Irish Mortgage Corporation.

Applicants will be given an immediate quotation and asked to fill out mortgage application forms. The mortgages can be quickly approved once applicants meet the necessary criteria and provisional approval will be granted subject to a property valuation.

The bank says it will target first-time buyers and existing homeowners. Anyone considering remortgaging their home will be offered a loan of up to £50,000 from the bank.

Bank of Scotland's entry into the Irish mortgage market had been expected but most industry analysts were surprised by how aggressively its mortgage product was priced.

The main banks and building societies will now have to review mortgage rates in response to the increased competition.

Bank of Scotland mortgages will be funded in euros and issued to Irish customers in pounds.

Mr White said the bank could typically borrow funds at a rate of 2.5 per cent and, by operating a low-cost direct sales operation, could offer mortgages to customers at a margin of 1.49 per cent.

Irish financial institutions borrow funds at the same rate but have traditionally operated on margins of 2.5-2.75 per cent.