Two-year mortgage rates drop below 3 per cent

Average interest rates on two-year fixed rate mortgages have fallen below 3 per cent for the first time, thanks to falling interbank lending rates and intense competition among lenders.

Moneyfacts, a price comparison site, found the average two-year deal slipped to 2.98 per cent at the end of March across products with a range of loan-to-value conditions. It said low inflation was both bearing down on swap rates, which lenders use to price mortgages, and lowering expectations of a rise in base rates.

Sylvia Waycot, editor of Moneyfacts.co.uk, commented: "The drop to zero inflation has resulted in constant speculation that any Bank of England base rate rise will be kicked to the kerb for the time being. Removing that concern has made it easier for lenders to drop some rates in order to be more competitive."

A fierce price war among lenders on fixed rates has been under way since last year, though the pace of reductions has eased in recent weeks.

Low inflation also meant those on a higher loan-to-value ratio had become less of a risk to lenders, because their spending power remained stable and they were less likely to fall into mortgage arrears. "Lenders normally factor this risk into the overall rate charged, so as the risk has lessened, so has the rate," Ms Waycot said.

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