Mortgages get cheaper as fixed rates fall

Borrowers are being offered cheaper mortgage deals with the UK's largest building society among the lenders announcing interest rate reductions.

Nationwide building society today announced it was cutting the cost of its fixed-rate mortgages for the second time in three weeks.

It has reduced the cost of its two-year fixed rate loan to 4.39% from 4.49%, while its three-year and five-year deals have also been reduced by 0.1% for people with a 10% deposit who pay a reservation fee. These now have rates of 4.59% and 4.69% respectively.

For homeowners wanting to borrow between 90% and 95% of their property's value the reductions are even bigger, falling by 0.3% to 4.69% for a two-year fixed-rate loan, while three and five-year deals cost 4.89% and 4.99% respectively. The new rates will be available from July 12.

First Direct has announced a rate cut on its three-year fixed-rate deal. The interest rate is now set at 4.89% until 2008, down from 5.25% in June, and borrowers can opt to offset their savings and current account balances against their mortgage to reduce the total cost of their debt.

Last week the Bank of England's Monetary Policy Committee (MPC) voted to keep interest rates on hold at 4.75%.

However, swap rates - the rates at which City institutions lend money to each other - have been falling recently in anticipation that the MPC will cut the bank base rate to 4.5% in August.

David Bitner, head of mortgages at Bradford & Bingley, said: "Over the last few months swap rates have been falling meaning lenders have been able to re-price their fixed rates downwards.

"Two, three and five-year money has become cheaper and two-year swap rates in particular have moved from an average of 5% to 4.5% over the last three months."

He said a cut in interest rates now looked imminent, and it was a "distinct possibility" that rates could fall to 4.25% by the end of the year.

Mr Bitner said: "Now fixes have become more competitive, and the differential with variable rates has narrowed, they've become increasingly popular.

"However, the reason why fixed rates have become more competitive is that they've already factored in rate falls. Moving forward, borrowers need to take this into account when deciding which type of mortgage to select."