Barclays and Abbey became the latest mortgage lenders to announce rate cuts yesterday as the cost of an average two-year fixed-rate mortgage fell below 7 per cent for the first time in weeks.

Barclays cut some of the rates offered by Woolwich, its mortgage unit, by up to 0.35 percentage points, while Abbey, Britain's second-biggest lender, is set to trim the rates on some of its fixed-rate deals by 0.1 percentage points tomorrow.

Other leading lenders, including Halifax, Lloyds TSB and Nationwide Building Society, cut their rates last week.

Experts said that the mortgage market had not yet fully recovered. Michelle Slade, an analyst for Moneyfacts, the financial website, said: “It is too early to say we have finally turned the corner. We need to see a more prolonged period of rate reduction.”

The rate cuts come after sharp falls in the interbank lending rates, which determine the cost of mortgages, in recent weeks. The two-year swap rate, which dictates the pricing on two-year fixed-rate deals, fell to 5.92 per cent yesterday, down from a peak of about 6.5 per cent in mid-June.

These rates soared in the wake of the credit crunch as activity in the wholesale markets, which some lenders rely on to raise funding, ground to a halt. Being deprived of this source of funding prompted many lenders to raise their rates and demand bigger deposits in an effort to control the number of applications that they were receiving. The lack of mortgages available to new borrowers is a key cause of the recent falls in house prices.

However, the recent rate cuts suggest that this trend may be starting to reverse. Ray Boulger, of John Charcol, the mortgage broker, said: “It seems that lenders' appetite for customers has increased a bit, but their lending criteria is still just as strict.”

Barclays is cutting the rates only on loans for borrowers with a 40 per cent deposit or a share of equity in their home. Borrowers will pay 6.29 per cent on the five-year fixed-rate deal, down from 6.39 per cent, while the rate on the ten-year fix has dropped from 6.29 per cent to 5.94 per cent.

The lender has also introduced one of the most competitive tracker deals on the market at 0.69 percentage points above the base rate, giving it a rate of 5.69 per cent.

Abbey is also introducing new mortgage deals, adding to the choice available to new borrowers. There are now 3,887 mortgage deals available, up from 3,403 at the end of June.