This could just be a rumour, but it looks like Virgin Money has lured a former Northern Rock chairman onto its board as it pursues a banking licence.

Virgin positioned itself as a bidder for Northern Rock before the bank's eventual nationalisation in February 2008, and it is still determined to become a High Street banking player. Now, Bryan Sanderson (chairman of Northern Rock until October 2007) has been appointed as a non-executive director to Virgin, which suggests a renewed bid for Northern Rock could be on the cards. 

This time round the deal could be even sweeter - although they're certain to face competition from certain financial giants.  The reason why is that government plans to split Northern Rock into a 'good' and a 'bad' bank are set to be approved.  Virgin would now effectively be bidding for the icing on the Northern Rock cake: the decent assets, the worthy loans, rather than the messy leftovers of an infamous high-octane lending spree.

And one factor that will count in Virgin's favour?  The Government is keen to encourage new entrants into a banking market that has seen many players disappear or raise the white flag.  Virgin is hardly brand new to finance, but in the world of mortgages it has been "missing in action" for six years since passing on the One Account to RBS in 2003.

In recent years Virgin has hardly been coy about its ambition to be a High Street bank, and today it looks like it could be one step closer.

We're not the only mortgage commentators to feel that the rapid growth of product fees has created an unwanted norm for applicants.

Nowadays, mortgage applicants are almost universally faced with a bill in the region of £1,000 for switching their mortgage.  What's more objectionable is how swiftly they've increased.  In 2006, the average mortgage product fees totalled £514; in just two years, that average almost doubled to £944. For a bit more context, consider that back in 1992 the average fee was just £98 - and there was a lot more work involved in the application process in those pre-internet days.

It seems clear that lenders have collectively jumped on the fee bandwagon so that they can gather their profits sooner on the mortgage deals they issue. An attempt by Alastair Darling to threaten lenders with FSA action on fees was predictably ineffective. The only thing that can reign in this proliferation of fees is a healthy dose of market competition, and so far that's been absent.

But is that finally about to change?

Firstly, fees are coming down for the first time in ages.  According to Moneyfacts, the size of the average fee charged on deals in the last six months took a dip from £944 to £925.

Secondly, a flurry of reasonable fee-free deals are on their way. It seems that major lenders are realising that many customers resent jacking up their loan by £1,000 or more just for applying, and they're finally competing to tempt those customers.

A&L, Britannia and Northern Rock have all introduced fee-free mortgages with a relatively modest 0.5% margin over their equivalent fee-bearing deals.

The Alliance & Leicester four-year fixed rate mortgage, for example, will charge 5.09% with a £995 fee, and 5.59% without.Britannia has fee-free fixes for both five and ten years, at 5.59 and 5.69% respectively, which are set no more than 0.5% above the rates it offers for people paying £999 application fees.Northern Rock's premium for a no-fee deal also comes in at under 0.5% on most loan-to-value scenarios.

However, not every borrower can benefit.  Arguably, the borrowers most in need of fee fee deals - those without a large amount of cash set aside - are the least able to find them.  Big deposits of 25-30 per cent are required for most of the above options.

It's also noticeable that this competition is so far confined to fixed-rate deals, which have higher interest payments to begin with than trackers at the moment. HSBC is one of the few banks to offer a fee-free option on its tracker mortgages. Again though, you have to be a first-time buyer with a 25% deposit to get one. How many of those are there?

Conclusion: it's great that there's some competitive activity on fee-free deals, as it might start to challenge the hegemony of four-figure fees. But lenders will have to go a bit further if they're going to provide options for the majority of applicants.

Cuts! Glorious cuts.  And that's despite no change in the base rate.

Woolwich was the first lender to announce it is dropping certain key rates, and Northern Rock and Abbey followed close behind.

They're not stingy cuts, either.  Interest on the Woolwich Lifetime Tracker mortgage for borrowers with up to 70 per cent loan to value (LTV) will drop nearly half a percentage point to 2.79%. That's still 2.29 per cent above base rate (see our previous notes of caution about trackers), but even so, for now that's a best-buy tracker for many. Alternatively, if the £995 fee puts you off and you're borrowing under 75 per cent LTV, there's a no-fee lifetime tracker available at 3.19%.

Northern Rock's cuts are less steep but it has managed to match Woolwich's 2.79% tracker mortgage rate.  This, however, is on a two-year deal not a lifetime deal. It asks for a smaller fee of £595.

Abbey, not quite matching the others' leading rates, launched a two-year tracker mortgage at 2.94% for borrowers with a 30 per cent deposit and a £995 fee. At the same fee level and LTV limit, Abbey also cut the rate to 3.88% on its 2-year fixed rate mortgage. All Abbey's deals are available through Alliance & Leicester branches as well as its own (and, of course, through mortgage advisers). 

HSBC hasn't reduced any mortgage rates (yet) but it did slightly pre-empt this flurry of cuts with its recently-extended 1.99% deal. 

Biggest cut of the day is the 0.6 per cent sliced off certain deals in Northern Rock's buy-to-let mortgage range. With fees of up to 2.5 per cent of advance, its lowest rates aren't ideal for everyone, but it does provide a no-fee buy to let mortgage at 7.39% fixed for two years (up to 70 per cent LTV). Serial investors also appreciate its £3 million, 10-property portfolio limit.

So, competition heats up among the big (non-bailout) boys – Santander, Barclays and HSBC – and Northern Rock is making aggressive moves again, notably on fees (an overlooked area of mortgage affordability).  Will smaller lenders be prompted to trim their lending rates too? Or will they compete on other factors, such as loan to value?  Watch this space.

What you save on fees, you'll more than repay in interest

Be careful if you're tempted by one of the no-fee deals being introduced this week by Northern Rock.

Of course, they're appealing to borrowers who have been put off by the need to pay at least £900 up front for other typical offers out there.  Many of us simply don't have that in spare cash.

But Northern Rock is no chump when it comes to profits: it increases its rates by up to a whole 1% in return for cutting out that fee. That's the kind of interest rate premium that could leave you cursing your pocket calculator in a year or two's time.

Facts on the new deals are as follows.  If you took out one of the new 2-year fixed rate deals, your options are:

• 4.09 per cent fixed until 2011 with a £995 fee, or
• 5.09 per cent fixed until 2011 without the fee.

So you'll save yourself nearly a grand today.  But 1% interest on a £100,000 mortgage is £1,000 a year anyway--not counting compounding, i.e. interest on top of interest. It doesn't take a maths whizz to demonstrate that this mortgage will cost you double what it saves you over the two-year fixed period.

If you're after low fees, try something rarer perhaps — for example, a discounted variable 2-year deal from Market Harborough Building Society (up to 75% LTV) costs only £245 in fees.

...but building societies are crying 'foul' over unfair competition.

The Government's plan is to divide Northern Rock's business into two: one part keeping the 'good' business in order to attract private sector bidders, the other part taking care of the 'bad' business that got it into trouble in the first place.

Building societies think this is unfair, as it will introduce a competitor without the burdens associated with the credit crunch.

The European commission is investigating the Government's plans for Northern Rock this week.  Attempting to protect its members against a new and unhindered competitor emerging, the Building Societies Association is urging the Commission that the healthy half of Northern Rock should pay financial penalties if the plans go ahead.

One thing's for sure: the government can't leave Northern Rock as it is, and with the banking sector not in the best of health, it'll probably be necessary to seduce bidders with some kind of restructuring.

However: the building societies have a cause worth sympathising with.  They far less to blame for the credit crunch than banks are, and Northern Rock shouldn't get a free pass back into the market.

What do you think - how would you resolve the conflict?