Good news for borrowers as mortgage rates fall at last

HSBC will today become the latest in a series of large mortgage lenders to trim the cost of its home loans, reducing its interest rates by up to 0.31 percentage points. In addition to cutting the cost of its fixed-rate deals – its two-year product will fall from 6.74 per cent to 6.43 per cent a year – HSBC said it would also reduce some of the fees it charges for the loans.

The bank, which has been one of the most aggressive players in the mortgage market, is cutting prices in response to similar reductions by lenders including Nationwide, Cheltenham & Gloucester, Abbey and Royal Bank of Scotland.

Bank of Ireland, a smaller player in the market, also announced price cuts yesterday. Mortgage experts said the cuts suggested some normality was returning to the market following a six-month period in which many lenders sought to reduce the number of loans on their books as funding in the institutional money markets has dried up. The average cost of fixed-rate mortgages reached a 10-year high last month.

"It is encouraging that, at long last, lenders are responding to the easing in wholesale borrowing costs and passing a discount on to the consumer," said Darren Cook, a mortgage analyst at market researcher Moneyfacts. "There is a sense that competition is finally returning to the fixed-rate mortgage market."

Lenders cost fixed-rate mortgages in line with rates in the wholesale swaps markets, where prices for two, three and five-year borrowing spiked in June amid concern about inflation. But since peaking at 6.52 per cent, swap rates have fallen to around 5.7 per cent, enabling lenders to cut the rates they offer to borrowers.

David Hollingworth, of independent mortgage adviser London & Country, said some lenders have also begun cutting the cost of variable-rate mortgages. Nationwide and Woolwich have both lowered the cost of new tracker mortgages, where rates move up and down in line with the Bank of England's base rate.

These reductions reflect a fall in Libor, the interest rate at which banks and other mortgage providers lend to each other. The three-month Libor now stands at around 5.78 per cent, around 0.5 percentage points below its peak.

Mr Hollingworth said there were signs that lenders were competing more actively for borrowers. "The rates have certainly been getting better in the past fortnight, with lenders responding to each other's price adjustments," he said. "You can't say yet that this is a definite trend, but there is more daylight."

Lenders have also mostly stopped tightening their lending criteria. While there are now almost no mortgage deals available to borrowers who want an advance worth more than 90 per cent of their property, there have been no significant reductions in maximum loan-to-values in recent weeks.

The slight easing in the mortgage market is unlikely to result in any significant improvement in the housing market, where first-time buyers continue to struggle. Lenders are also continuing to focus on borrowers with the best credit records.

The falling cost of loans will be welcomed by borrowers coming to the end of short-term fixed and discounted variable-rate mortgage offers. Some 750,000 borrowers are due to negotiate remortgage deals in the second half of this year.