Halifax has today cut the cost of its mortgages, following Northern Rock and Lloyds’ interest rate cuts yesterday.

Halifax customers coming to the end of their short-term mortgage deal can now benefit from lower product transfer rates. The new rates start from 5.99 per cent on 2 and 3 year tracker-rates and 6.19 per cent on 2 and 3 year fixed-rates.

Northern Rock and Abbey announced small cuts on its fixed-rate deals yesterday, while Lloyds TSB announced lower rates for those with a deposit of 40 per cent or more. Cheltenham & Gloucester, Nationwide and HSBC have also cut their fixed-rates in recent weeks.

The average two-year fixed rate from the five biggest mortgage lenders is now 6.43 per cent, according to financial information website Moneyfacts.co.uk. The same rates hit an average of 6.92 per cent last month.

However, borrowers will still need a large deposit to benefit from the best deals. The average loan-to-value (LTV) offered by lenders is 80 per cent of the property’s value, down from 90 per cent a year ago.

Northern Rock’s new fixed rate deals all come with a fee of £1,495. With a 25 per cent deposit, the rate will be 5.89 per cent but this rises to 6.34 per cent with a 20 per cent deposit and 7.19 per cent with a 10 per cent deposit.

Ray Boulger at broker John Charcol said: “Northern Rock previously tried to discourage existing borrowers from staying on its books by keeping its rates high. However, those borrowers coming to the end of a fixed-rate who still have more than 90 per cent of their property value to repay have found it near-impossible to get deals elsewhere.

“This means that the Rock has been left with a lot of high-risk borrowers. These new rates are aimed at attracting low-risk borrowers with large deposits, in order to achieve a better balance between high and low risk custom.”

It is 12 months since the credit crunch took hold, which lead to the rapid shrinking of the mortgage market as deals were withdrawn and interest rates raised. But experts say the situation is now “steadily recovering”.

Michelle Slade at Moneyfacts said: “Over time the mortgage market should continue to improve from its current position. The number of products will steadily increase and rates will lower with increased competition between lenders.”

However, experts gave warning that the recovery will be slow during this time of economic uncertainty. Whilst swap rates, the rate at which banks lend to each other that usually determines fixed-rate mortgages, are falling, other factors may keep the cost of mortgage borrowing high.

Ms Slade said: "The standard factors which usually determine the rates at which mortgage rates are set, including bank base rate, swap rates and Libor rates, are all much lower than this time last year, yet the rates on offer are much higher.

"As house prices continue to fall and the risk of default increases, the lenders are pricing more for risk and, as a result, these standard factors are not quite as influential on the rates as they once were.”

The market in mortgage-backed securities, which the banks used to fund almost two-thirds of lending in previous years, is effectively closed.

Last week Northern Rock reported that it lost £585m in the first six months of the year compared with a profit of almost £300m over the same period in 2007.

Money Central: the latest house price trends, region by region