Woolwich yesterday cut the interest rate it offerers borrowers for fixed mortgages over five years from 6.99 per cent to 6.79 per cent. Nationwide also announced it had cut its five-year fixed rates by half a percentage point to 6.99 per cent.
The cuts follow a dramatic drop in long-term interest rates, enabling mortgage providers to borrow cheaply and pass on the savings to customers.
Earlier in the week, Abbey National launched an offer of 6.49 per cent, fixed for five years, and cut mortgage arrangement fees to pounds 250 from pounds 395. Northern Rock responded a day later by cutting its rates to 6.45 per cent. Until a week ago, very few providers offered rates of less than 7.25 per cent on five-year fixed-rate mortgages.
Industry observers believe the latest cuts create an unprecedented situation for new borrowers where fixed-rate mortgages are substantially cheaper than those with variable rates.
Most variable mortgage rates now hover between 8.25 and 8.45 per cent. But borrowers can now fix their payments at a rate almost two percentage points below this. With the next move in interest rates expected to be up, the gap is likely to grow further in the short term.
Mark Chilton, a mortgage expert at international property consultants Savills, said: "There is now a stunning differential between fixed and variable rates which may be unprecedented. Every man, woman and child in the country should be looking at this."
Mortgage brokers believe the deals on offer may be so cheap that existing borrowers as well as new borrowers may benefit from taking them up. Past experience in other countries, such as the US, indicates that borrowers benefit from switching if fixed rates are more than 1.25 points below variable rates.
The rates may only be on offer for a short time. Mortgage providers set in motion the cheaper deals at the beginning of the week when they could borrow long-term money at a rate of just 6.6 per cent. Long-term interest rates have since risen to more than 6.9 per cent.