Barclays-owned lender Woolwich has announced a new mortgage with a rate of less than 2%.

People with a 40% deposit are being offered a step tracker with a starting rate of 1.98% for one year.

Woolwich has become the second lender in two weeks to launch an under-2% deal after HSBC released a 1.99% mortgage. The move is a further sign that the mortgage market may be seeing a return of competition.

The group has also cut the rates on two of its fixed rate loans. A two-year loan for people with 30% deposit is being offered 0.1% lower at 3.99%, while the three-year deal has rates reduced by 0.4% to 4.49%.

The Woolwich's step tracker has a rate of 1.48% above the Bank of England base rate for the first year, giving a current rate of 1.98%, after which it reverts to a lifetime rate of base rate plus 2.49%, giving a rate of 2.99% if the base rate stays at 0.5%.

Borrowers have to pay a £999 arrangement fee to take it out, and they face early redemption charges of 2% of the balance repaid for the first three years. It is also only available to people borrowing at least £200,000.

Ray Boulger, senior technical manager at John Charcol, said taken over three years the product had an average rate of 2.65%, assuming the base rate did not rise, which was a "reasonable but not fantastic rate".

But he said people taking out tracker deals at the moment should avoid mortgages that locked them in, as they were likely to want to remortgage to a fixed rate deal within the next two to three years.

Woolwich is the latest of a number of major lenders to cut their mortgage rates this month, although other groups have continued to hike them, with Royal Bank of Scotland last week increasing the cost of its fixed rate deals by up to 0.7%.

Research from financial information group Moneyfacts also showed that average margins on fixed rate deals had hit a new high, after lenders failed to pass on reductions in wholesale funding costs.

The group said margins on five-year fixed-rate mortgages had increased by 0.9% since the beginning of the month to 2.95%, while the differential on two-year fixed-rate mortgages above two-year swap rates has also risen by 0.6% to 3.27%.

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