The average cost of a two-year fixed rate mortgage is back at the level it was in August last year, when the credit crunch first began to bite.

Figures showed that in falling back from the big increases of last year, rates are dropping at their most prolonged rate since the crisis began.

Although the Bank of England base rate was 0.75% higher last year the average rate for a two-year fixed rate loan is now 6.39%, around the same level.

Lenders have made a series of cuts, as competition has returned to the market. Nine of the UK's top 10 lenders have reduced the cost of a two-year fixed-rate loan by an average of 0.52% since July 11 after they peaked at 7.08% at the beginning of the same month.

Three lenders are also cutting their arrangement fees, according to financial information group Moneyfacts.co.uk.

Britain's biggest mortgage lender Halifax has led the way, slashing its two-year fixed rate deals by an average of 1.28%, while it has also reduced arrangement fees by around £301.

Bradford & Bingley has made the next biggest reduction at an average of 0.76%, followed by Lloyds TSB's lending arm Cheltenham & Gloucester at 0.72%, although both of these groups have increased their arrangement fees, raising them by £83 and £627 respectively.

Nationwide Building Society has also introduced above-average cuts of 0.63% to its two-year fixed-rate range since July 11.

But recently nationalised bank Northern Rock has left its two-year fixed-rate deals virtually unchanged, cutting them by an average of just 0.01%, while it has increased its arrangement fees by an average of £500.

Michelle Slade, analyst at Moneyfacts.co.uk, said: "The cost to lenders in obtaining the funds for mortgages on the money markets has dropped significantly in the last few months and we are now seeing some relief for borrowers who are looking for a new deal.

"I doubt we will see rates being cut to levels similar to when base rate was last at 5%, but we should hopefully see further cuts from the big lenders in the coming months."

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(Moneyfacts.co.uk)