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Interest on fixed rate mortgages at six-year low

The interest charged on two-year fixed rate mortgages fell to a six-and-a-half-year low during February in a further sign that competition was slowly returning to the market, figures showed today.

The average cost of a two-year loan dropped to 3.88% during the month, down from 3.97% in January, to stand at its lowest level since July 2003, according to the Bank of England.

There was also a fall in the average cost of a five-year fixed rate mortgage, with this dropping to 5.49% from 5.56%, while tracker rates increased slightly to 3.69%, although they remained at their second lowest level since records began in 1997.

A number of banks and building societies cut their rates during February, with many launching new best-buy deals in a bid to tempt borrowers to remortgage away from their lenders' standard variable rates.

There was also a big increase in the number of products available for people with only small deposits, as lenders became more comfortable with the risk these borrowers represented.

The number of different mortgage products available also broke through the 2,000 barrier for the first time in more than a year during the month.

But despite the improvement in mortgage rates, the cost of unsecured borrowing increased or remained the same during February.

The average rate charged on a credit card rose to 16.51%, up from 16.37% in January.

It was the fifth consecutive month during which the rate has increased or stayed the same, pushing it up to its highest level since June 2006.

Loan and overdraft rates remained unchanged during the month, but at 18.95% the amount of interest people who go into the red are charged was only slightly below the record high of 18.97% reached in the second half of last year.

There was also further bad news for savers, with the average return paid on a fixed-rate bond dropping for the sixth consecutive month.

The products had been one of the few remaining havens for savers struggling to get a decent return on their cash, as banks and building societies rewarded people who were prepared to lock up their money for a set period of time with higher rates.

But interest paid on the bonds fell to an average of 2.39% during February, down from 2.41% in January, to stand at less than half of the recent peak of 6.06%, seen in July 2008.

Returns paid on branch-based instant access and notice accounts remained unchanged at 0.17% and 0.46% respectively, while there was a slight rise in ISA rates from 0.41% to 0.47% as providers geared up for the approaching ISA season.

Meanwhile, Barclays' lending arm, the Woolwich, bucked the recent trend for lenders to reduce their rates and the size of the deposits they require.

The group said it was pulling its fixed-rate and tracker deals for people borrowing 70% of their home's value, and instead replacing them with ones lending up to 60%, although it will continue to lend up to 85% on certain products.

It is also raising rates on its two-year fixed and tracker deals for people with a 25% deposit by 0.3%.

A spokeswoman said: "The changes are in response to very strong demand for our mortgages over recent weeks.

"It is important for us to preserve a controlled level of business that ensures we meet our desired levels of service."