Two-year fixed-rate mortgage costs drop below 5%

The average cost of a two-year fixed-rate mortgage has fallen below 5 per cent for the first time in five months, research showed today.

People who want to fix their mortgage rate for two years are now typically paying 4.99 per cent, according to financial information group Moneyfacts.co.uk.

The group said it was the first time average rates on a two-year fixed-rate mortgage had been less than 5 per cent since 23 June.

The cost of the deals rose sharply during July to peak at 5.21 per cent as lenders responded to rising swap rates, upon which the mortgages are partially based.

But they were less quick to react to subsequent falls in swap rates, instead increasing the margins they charge on the deals.

The average margin charged on a two-year fixed-rate mortgage is now 3.21 per cent, up from 2.72 per cent in June.

But there has been a flurry of lenders cutting their rates in recent weeks as competition slowly begins to return to the market.

Michelle Slade, spokeswoman for Moneyfacts.co.uk, said: "Borrowers are finally starting to see more positive news coming out of the mortgage market.

"Falling rates on popular two-year fixed-rate mortgages, occurring against a backdrop of lenders raising the maximum loan to value ratios on their most competitive deals suggests that competition is increasing.

"Lenders have become accustomed to the post banking collapse world and appear to finally be relaxing their credit criteria while remaining within a regulated frame work."

But the situation is less positive for people who want to fix their mortgage costs for a longer period, with the average cost of a three-year fixed-rate mortgage actually increasing over the period to stand at 5.58 per cent today.

The margins charged on five-year fixed-rate deals have also reached their highest level on record at 2.98 per cent, giving an average rate of 6.15 per cent.

This is well up on the average cost of a five-year fixed-rate deal of 5.57 per cent in June, despite five-year swap rates falling from 3.38 per cent to 3.17 per cent during the same period.

Ms Slade said: "Swap rates have been falling over the last few weeks, but mortgage rates on medium term deals are yet to follow suit.

"Borrowers will be hoping the easing of credit criteria continues and that lenders will start to reduce the large margin for risk they have been taking over the last year.

"While it may still be too early to say the worst is over, the signs are all there."