Low mortgage rates could lead lenders to give out too much money to borrowers, threatening the housing market, the State's largest building society EBS has warned.

EBS yesterday cut its variable mortgage rate, maintaining its position as the cheapest lender in the market.

The new rate of 3.85 per cent undercuts Bank of Ireland's 3.95 per cent. Ulster Bank, Irish Life Homeloans and National Irish Bank also cut their rates yesterday. First Active is the only large lender which has yet to react to the larger banks' cut to below 4 per cent last week.

Irish Life Homeloans, which is to become IIB Homeloans from January 1st, cut its rate to 3.99 per cent as did National Irish Bank. These reductions take effect from October 1st and 4th respectively. Ulster Bank cut its rate by 1.07 percentage points to 3.98 per cent.

But the EBS head of lending, Mr Martin Walsh, warned that the scramble for market share by lenders could lead to massive over lending and future problems for all concerned.

"What happened in the UK after 1988 should be borne in mind. They had huge problems of arrears and negative equity which damaged the lives of many individuals and contributed significantly to their subsequent economic problems," he said.

Mr Walsh also cautioned that borrowers should not get carried away with cheaper funding and risk fuelling a borrowing boom.

"Interest rates will rise again and to a point significantly higher than they are now. It may take a couple of years but rise they will. Debt servicing costs could be almost twice what they are now at some point in the future."

He also warned that if house prices keep galloping away, it means they will have further to come back.

"There is no fundamental reason why prices paid for new houses should be any higher in five years' time."

Bank shares continued to take a pounding in the wake of the last week's huge cuts in mortgage rates and even a further share buy-back failed to stop Bank of Ireland shares falling back to near the level they were at before the buyback programme started.

Bank shares have also been hit hard by a belief in some quarters that other overseas lenders will follow the lead of Bank of Scotland in the mortgage sector and undercut the Irish banks by offering cheaper loans for the likes of cars and house improvements. Add in the overall weakness of stock markets and there are few buyers of bank shares.

Yesterday, Bank of Ireland followed its buy-back of 47.4 million shares on Wednesday at €8.45 (£6.65) with a further buy-back of 4.6 million shares at €8.15 (£6.42 each). But just as the Wednesday buy-back at €8.45 did not put a floor under the share price, neither did yesterday's action at €8.15 and Bank of Ireland shares fell back to close on €7.80 (£6.14), a fall of 35 cents on the day. At the close, the shares were just above their 1999 low of €7.65 (£6.02).

Allied Irish Banks did fall to a 1999 low with a 30-cent fall to €10.95 (£8.62), while First Active fell five cents to €2.75 (£2.17), below its price of £2.25 at last October's flotation. Irish Life & Permanent was the only publicly quoted mortgage lender not to fall on the day and was unchanged on €9.10 (£7.17).

The Labour party finance spokesperson, Mr Derek McDowell, said he would put forward a motion to instruct the Tanaiste Ms Mary Harney to refer the home loans market to the Competition Authority.