Mortgage rates have fallen as competition between lenders intensifies ahead of the Bank of England’s next rate decision.

The average rate for a two-year fixed deal, which had been very close to 6% at the start of the month, is now at 5.79%, according to the financial information service Moneyfacts. The average five-year rate is 5.39%.

The Nationwide has become the latest lender to move, by reducing its five-year fixed mortgages, for new customers moving home with a 40% deposit, to a rate of 3.99% plus a fee.

Mortgage analyst Kylie-Ann Gatecliffe said this could be the start of a “rate war” between the big banks.

The last time Nationwide – the UK’s biggest building society – offered rates below 4% was in February.

“Although this is only available for purchases right now, we hope that the re-mortgage market will follow,” said Sarah Tucker, founder of The Mortgage Mum.

Matt Smith, from property portal Rightmove, said: “We’ve seen average mortgage rates drop at a pace not seen for a while this week.

“The first sub 4% rate for those with larger deposits and prepared to pay a higher fee is the headline-grabber, but we’ve also seen some notable drops in rates in other loan-to-value brackets which should benefit more mass-market movers.”

Mortgage borrowing costs remain higher than homeowners have seen in a decade because lenders base their mortgage rates on the central bank’s rate.

This remains at a 16-year high of 5.25%, but some predict it will cut rates at the central bank’s next meeting on 1 August because inflation is falling.

Central banks tend to increase borrowing costs when inflation is high and decrease them when inflation is low or to stimulate a sluggish economy.

Even if rates drop, many borrowers will still struggle to make repayments.

Around 1.6 million existing borrowers will be looking to re-mortgage as their current fixed-rate deals expire, with some moving off a rate of less than 2%, leaving them facing much higher repayments on their next home loan.

However, Ms Tucker says Nationwide’s new rate is “a hugely positive sign for the mortgage market” during a “turbulent time”, as people struggle with high costs of living and high borrowing rates.

“This is a fantastic sign of stability and lower interest rates ahead,” she said, adding that the recent general election “has helped consumers and the market to feel more stable”.

“Mortgage rates could fall further, but it is difficult to tell how quickly and by what margins,” said Rachel Springall, from Moneyfacts.

She added: “Those waiting for the Bank of England to cut base rate may be crossing their fingers for August, but this has split opinions among economists who are now pointing towards September at the earliest due to stubborn service inflation.”