Fixed rate mortgages get cheaper

Popular fixed rate deals are still more expensive than a year ago

The cost of some new fixed-rate mortgages became cheaper in July, the Bank of England has confirmed.

Its latest figures show that the average rate charged by lenders on a new two-year deal, for someone with a 25% deposit, was 6.36%.

That was down from an eight-year high of 6.6% in June.

In the past month all the big lenders, and some smaller ones, have been cutting their rates to try to attract new borrowers.

It is the first time since February that the average cost of these mortgages has fallen.

That trend continued last week with further small reductions by the Abbey and the Halifax.

Borrowers with at least 25% to put down have also seen three- and five-year rates stay the same or fall slightly.

But borrowers looking to fix their home loans for five years, and with just a 5% deposit, are paying more, up from 7.13% in June to 7.14% in July.

Risk

It is one year since the start of the credit crunch, which has caused an unprecedented contraction in the UK mortgage and housing markets.

As a result, the cost of borrowing to buy a home is significantly higher than it was 12 months ago.

The financial information service Moneyfacts said that interest rates, and the fees demanded by lenders are higher, while borrowers now have to put down much larger deposits.

"The standard factors which usually determine the rates at which mortgage rates are set, including bank base rate, swap rates and Libor rates are all much lower than this time last year, yet the rates on offer are much higher," said Michelle Slade of Moneyfacts.

"As house prices continue to fall and the risk of default increases, the lenders are pricing more for risk," she added.

Despite last month's modest retreat in borrowing costs to the public, the average rate being charged on the popular two-year fixed rate deals is still at its highest since the summer of 2000.

"It will be a while before lenders regain a healthy appetite to lend, with the maximum loan-to-values on offer largely determined by the future decline in property values," warned Ms Slade.