BANKS cut their rates and relaxed their criteria last week despite warnings that the shortage in home-loan finance will persist until 2010, writes Ali Hussain.

Sir James Crosby’s interim report on mortgage funding, published last week, warned the credit crunch would continue to “take its toll” on lending for at least the next two years.

However, as Crosby unveiled the report, Abbey increased its “jumbo” loans range with the introduction of two products that offer up to £5m. The minimum loan size is £550,000 and the products come as either a three-year fixed-rate deal at 6.79% or a three-year tracker at 6.34%. Previously, the bank would only lend up to £550,000 on a three-year fix. It is also slashing rates on its two and three-year fixed and tracker deals by as much as 0.15%.

HSBC also cut its two, three and five-year deals to 6.43%. Arrangement fees are down to £599.

Richard Morea of broker London and Country said: “Banks are more willing to lend as rates in the wholesale markets have come down.”

The moves from Abbey and HSBC follow similar cuts by Halifax, Lloyds TSB and Nationwide last month.

The lowering of rates is due largely to the reduced cost to banks and building societies of borrowing money in the wholesale markets. Two-year swap rates, on which fixed rates are based, have fallen from 6.48% in June to 5.71%.

Libor — the rate on which variable and tracker rates are based — is also heading down. Three month Libor reached a high of 6.01% in March, but was last week down to 5.78%.

Melanie Bien at broker Savills Private Finance, said: “With swap rates continuing to fall, the big lenders with strong balance sheets and an appetite to lend are likely to carry on reducing their fixed rates and some trackers.”

Both the Abbey jumbo deals require at least a 40% deposit. The HSBC deals are available to customers with only a 10% deposit.

You can get a better deal if you have a larger sum to put down. Britannia, for example, offers a rate of 5.89% on a five-year fix with a £999 fee if you have a 25% deposit. First Direct has a three-year fix at 5.95% with a £598 fee.

Martin Ellis, Halifax’s chief economist, predicts Bank rate will remain on hold with some “trimming” early next year. So trackers could be a good option.

Bien said: “If you can afford to be wrong — that is, if rates rise you will be able to afford it — a tracker is cheaper, at least initially, and may make better sense in the long run.”