Lenders in effect killed off cheap two-year trackers for new borrowers last week, with the average rate now at 7.26 per cent - above Halifax’s benchmark standard variable rate of 7 per cent.

Trackers are also 1.36 points higher than the banks’ cost of funding, which settled at 5.9 per cent last week, suggesting lenders are using the opportunity to boost profit margins.

Abbey, Alliance & Leicester, HSBC, Halifax and Nationwide and Britannia building societies all increased rates on headline fixes and trackers for new borrowers, despite the quarter-point cut in Bank rate.

Britannia increased the rate on its two-year tracker by 0.60 points, adding £1,200 a year to the cost of a new loan.

At the start of last week the cheapest two-year fix was from HSBC at 4.99 per cent, but by the end of the week the best deal for new borrowers was from Cheshire at 5.49 per cent - 0.50 points higher, £700 a year on a £200,000 loan.

The mayhem in the mortgage market was epitomised by Abbey's decision to cut the rate on some trackers for new borrowers – the first lender to do so in months – but simultaneously increase some fixes by 0.10 points and hike the arrangement fee on its five and ten-year fixed-rate deals by £500 to £1,499.

Chairman of the Council of Mortgage Lenders Steven Crawshaw stressed last week the “real possibility” that net lending this year could plunge to half last year’s level without more help from the government and the Bank of England.

We explain the mortgage mayhem.

Will I benefit from the rate cut?

Those lucky enough to have taken out Bank of England base rate tracker – especially at a rate below 6 per cent – are the only borrowers guaranteed to benefit from last week’s quarter-point cut, as well as future rate cuts. Those on £200,000 loans will see a £30 reduction in their monthly repayments. However, borrowers should be aware that most banks take a month to pass on the cut, with BM Solutions waiting up to three months before borrowers see any reduction in their bill.

Are standard variable rates going down?

HBOS, which owns Halifax; Nationwide; Woolwich; Cheltenham & Gloucester; and RBS, which owns NatWest, all reduced their SVRs by the full 0.25 points last week.

However, there are no guarantees – Standard Life and Chelsea building society were among the six lenders that failed to pass on February’s quarter-point cut.

While some lenders’ SVRs are cheaper than their tracker rates, brokers advise borrowers not to stray on to SVRs because banks have complete discretion over them.

Those who urgently need to remortgage but can’t decide on a good short-term deal can still take out a lifetime tracker below the average such as HSBC’s at 5.73 per cent with no early repayment charges and switch when rates start to improve.

Should I take out a fix or tracker?

For months, fixed rates have looked better value than trackers, but that was turned on its head last week. Halifax’s two-year tracker at 5.38 per cent with a fee of £999 for borrowers with a 25 per cent deposit is cheaper than the best fix from Cheshire at 5.49 per cent with a fee of £1,998. Monthly repayments on the Halifax deal work out at £1,213 compared with £1,226 on the Cheshire deal.

Is there anything I can do to get a better rate?

Experts do not expect the mortgage market to improve for another year, so if you are coming to the end of your fixed term in the next six months, begin looking for a new rate now.

It may be worth paying off some of your loan as you will do better if your equity is more than than 25 per cent. Rates are an average 0.86 points higher for a fix if you have less than 25 per cent.

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