LONDON (Reuters) - Interest rates on new two-year fixed mortgage deals for buyers with healthy deposits fell to their lowest since records began in May, data showed on Thursday, offering some relief for hard-pressed house buyers.
The average rate on 2-year loans where buyers borrowed three-quarters of their home's value fell to 3.47 percent from 3.66 percent in April, the lowest since the series began in 1995, Bank data showed.
Britain's housing market is stagnating and many economists expect prices to drift lower this year as buyers are squeezed by high inflation, tax rises and muted wage growth.
Mortgage approvals are running at less than half their pre-financial crisis levels and many people, particularly those looking for their first home, are struggling to save larger deposits to secure the best deals.
While the competitive rates on lower loan-to-value (LTV) mortgages are positive, the property market needs cheaper deals for buyers with small deposits, economists said.
"It's clearly better for the housing market if mortgage rates are falling rather than rising, so it has to be a helpful sign," said Citigroup economist Michael Saunders.
However, people who have saved only a 10 percent deposit will have to pay a large premium for a two-year fixed deal. May's average rate for those borrowing 90 percent of the value of their new home over two years was 5.94 percent, below April's 5.98 percent but higher than the 5.91 percent seen in February.
There is a 2.47 percent spread between rates for 75 percent LTV mortgages and 90 percent deals. The spread is down slightly from the 2.85 percent seen a year ago but is far higher than the 0.26 percent average spread during 2000-2007, Saunders added.
"We need the higher LTV figures to improve in order for the housing market to get back to anything like what we used to call normal," he said.
The Bank held interest rates at a record low of 0.5 percent earlier on Thursday and expectations that the first rate rise won't come until late this year or even early in 2012 should lend support to the housing market.
Editing by Andy Bruce