The UK's largest building society will next month introduce a new basic rate of 6.49%, called the "base mortgage rate" (BMR).
This rate will be for existing lenders not on a special deal.
Half a million Nationwide customers will benefit as the rate they pay falls from 7.09% to 6.49% - equivalent to a £23 per month fall on a £60,000 repayment loan.
The building society says that its new rate will protect existing borrowers, who have typically been forced to subsidise new borrowers.
The building society's new rate is about 1% lower than the standard rate offered by other mortgage providers.
A drop in payments
However, introductory discount and special fixed rate deals from an array of other lenders will undercut the new Nationwide rate.
Ray Boulger at Charcol Insurance Brokers described Nationwide's move as a "high-risk strategy".
"In the short term it's going to decimate their new business levels," he told BBC's Working Lunch TV programme.
New borrowers will focus on headline rates of 5.25% to 5.5% offered by other mortgage lenders, he added.
The borrowers who do have special deals with Nationwide will have their mortgages pinned to a slightly higher rate, called the "standard variable rate", until their deals run out.
But from 1 March this standard variable rate (SVR) will also be reduced from 7.09% to 6.99%.
When their deals run out, such borrowers will then switch over the new base mortgage rate.
Nationwide argues that its SVR mortgage of 6.99% is still lower than the equivalent rate at other building societies.
The building society will also phase out its co-called standard variable rate once all its special deals have run their course - in approximately five years.
"We are trying to be as fair as possible to everyone," said Steve Blore, a spokesman.
No more discounted deals
The building society will no longer offer discounted deals to entice new lenders.
"The mortgage market has become increasingly perverse with existing borrowers being penalised to subsidise new business acquisition," said Brian Davis, Nationwide's chief executive.
But Nationwide will offer one special deal, called the "budget option-based mortgage rate", which will offer a rate of 5.29% for the first two years, and then 7.29% for years three to five.
The building society says this will not count as a discounted deal because the average rate over five years will still be 6.49%.
With the new BMR mortgage, an average existing Nationwide borrower will save more than £50 per month, compared to a similar customer paying a SVR of 7.5%.
Will others follow suit?
Other mortgage providers have had a mixed reaction to Nationwide's move.
The Woolwich, now owned by Barclays, said customers were aware of competition in the mortgage market and were free to re-mortgage to a better deal.
Halifax, Britain's biggest mortgage bank, said it noted Nationwide's move "with interest".
And HSBC agreed with Nationwide's reasoning that many lenders left existing customers out in the cold on the standard variable rate.
An HSBC spokesman said it had cut its rate last year to 6.5%, and argued that Nationwide had in fact followed its lead.
Windfalls pressure
Nationwide estimates there are currently around three million borrowers with mortgages totalling £100bn in the UK.
It says that if all major lenders followed Nationwide's approach it would lead to an overall saving of more than £1bn a year for existing borrowers.
Nationwide is the largest remaining building society in the UK but is coming under fresh pressure from some members who want it to convert from a mutually owned society into a bank.
Such a move would provide windfalls for members, but Nationwide hopes to persuade its members and customers that they are better off in the long run by it remaining with its current status.