Mortgage Informer

The average cost of a leading two-year fixed rate mortgage has fallen by more than 1% during the past six weeks, figures have shown.

Interest rates charged on best buy two-year fixed-rate deals have been slashed by 1.16% since the beginning of August as competition returns to the market and lenders relaunch sub-5% rates.

The cost of a leading three-year fixed rate loan has also fallen by around 0.56%, while best buy five-year deals are down by an average of 0.4%, according to mortgage company mform.co.uk.

The cost of tracker deals has also fallen in recent weeks, with market leading two-year trackers seeing their rates come down by 0.89% despite the Bank of England base rate remaining on hold. But the recent trend among lenders to cut their rates is likely to come to an abrupt end following the fallout from the collapse of Lehman Brothers.

While lenders are not expected to increase their rates as they did earlier this year, it is thought likely that they will stop passing on any reductions in wholesale funding costs to borrowers.

Michelle Slade, analyst at Moneyfacts.co.uk, said: “The number of cuts to mortgage rates has slowed in the last week. Lenders are likely to be playing a wait and see game at the moment to see how things pan out in the money markets before they make their next moves.”

Ray Boulger, senior technical manager at John Charcol, said: “Anything like this which causes uncertainty has an impact on the banks. Some will want to cut back on lending in the short-term.”

A number of the larger lenders are likely to have exposure to Lehman Brothers through complex credit derivative contracts and it will take some time before they establish the size of their exposure and how much they will have to writedown as a result.

There are also fears that events at the US investment bank will lead to a renewed tightening in wholesale money markets, where banks raise their funds, with the inter-bank lending rate Libor already increasing slightly following Lehman Brothers’ collapse.

It generally takes about two weeks for movements in the wholesale markets to filter through to mortgage rates.

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• Banks cut mortgage rates further

Tags: Mortgage costs