Britain’s biggest lenders slashed the cost of mortgages last week even though the Bank of England kept interest rates on hold, signalling better times for borrowers.

City analysts now expect the Bank to cut rates by 1% or more over the next year as it seeks to stave off recession, shaving £2,000 a year off the cost of a typical £200,000 home loan.

Martin Ellis, economist at Halifax Bank of Scotland, expects a 0.25 percentage-point cut before the end of the year. By the end of 2009, he thinks Bank rate could go to 4% and “possibly lower”. George Buckley at Deutsche, the investment bank, thinks the first cut will be in February with a full percentage-point cut by this time next year.

Lenders have slashed mortgage rates ahead of any move by the Bank, with Halifax, Abbey, Cheltenham & Gloucester and NatWest announcing cuts last week.

Average two-year fixes are now back to where they were before the credit crunch at 6.39%, according to financial website Moneyfacts — a drop of 0.69 points from their peak of 7.08% at the beginning of July.

The best fixes are now slightly cheaper than trackers, but brokers warn against rushing in if you agree with the economists that Bank rate will fall next year.

Halifax, Britain’s largest mortgage lender, has made the biggest cuts, slashing its two-year fixes by up to 1.28 percentage points since July this year. The average fee on its two-year deals has also been reduced by £301.

Michelle Slade of Moneyfacts said: “Only time will tell if we have finally turned a corner, but this is the most prolonged period of cuts we have seen since the credit crunch began just over a year ago.”

Abbey has cut rates on its jumbo mortgage products, aimed at customers wishing to borrow £550,000-£5m. A three-year fix with a 40% deposit is down by 0.35 percentage points to 6.45%.

Melanie Bien of adviser Savills said: “While the Bank held interest rates this week, a reduction before the end of the year is likely, which will benefit those on a variable-rate deal further still.” Here we offer some advice for borrowers and savers.

Don’t fix your mortgage yet

Fixed rates have come down a great deal, but with the prospect of further cuts in Bank rate, brokers said you would be better off going for a tracker rate.

The best two-year fix, from Yorkshire building society, is at 4.89% with a hefty 2.5% fee, against the best tracker at 4.99% from C&G. If economists are right, this could be down to 3.99% this time next year.

A good option is a “drop-lock” tracker, which lets you switch to a fix at any point without having to pay the usual 1%-2% early redemption charge (ERC). That way, you could lock in to a better fix when interest-rate expectations have bottomed, which may be later this year. From Wednesday Halifax will waive the ERC on all its tracker deals but only for the first year.

Nationwide has two trackers with a drop-lock option for those with a 10% deposit. You can take a rate of 6.13% with a £1,499 fee or 6.43% with a fee of £599.

On a £200,000 mortgage over the two years, you would save £1,200 in interest payments if you paid the lower rate so you would be £300 better off after paying the additional £900 arrangement fee. However, if you left after one year, you would save only £600 in interest payments, so it would be better to go for the higher rate.

Ray Boulger at broker Charcol said: “I would say it is probably better to go for the cheaper-fee option as this means you can exercise the drop-lock option without having to wait so that it becomes worthwhile.”

Fix your savings

Saving rates over 7% are still available, but they are unlikely to be around for long, according to Moneyfacts.

Slade said: “Since the last Bank rate cut in April, we have seen more than 100 savings-rates increases as banks try to shore up money from savers. However, as rates in the money markets start to ease, the top deals are unlikely to stay as high for much longer.”

Last week, despite the fact that Bank rate stayed on hold, Bradford & Bingley (B&B) cut rates by up to 0.25 percentage points across its savings range for existing customers, while Yorkshire dropped rates on some of its fixed-term deals by 0.2 percentage points.

However, there are still some rates available paying more than 7%. ICICI pays 7.2% on its HiSave account for a year, while Anglo Irish Bank pays 7.05%.

Despite B&B’s reductions for existing customers, it is the best buy for easy access savings with a rate of 6.51%.

Fix your annuity

Annuity rates have dipped this month, after a year in which retirees have enjoyed higher rates, according to advisers Alexander Forbes.

Last week, the top level rate from Norwich Union dropped £110 to £7,040 a year for a 60-year-old male with a £100,000 fund. Despite the dip, today’s best rates are still £275 a year higher than the best available one year ago, and experts suggest it is time to lock into the best deals.

David Marlow, a director at Alexander Forbes, said: “With annuity rates slipping and pensioner inflation running at possibly double the official rate, retirees must make the most of the open-market option and think carefully about protecting the long-term value of their retirement income.”

Using the open-market option, which means you do not have to buy your annuity from the same company that managed your pension, could secure you an extra 10% to 15% income a year.

Remember that a conventional annuity, where your income is fixed at the outset, is unlikely to protect against inflation, which is as high as 9% for pensioners, according to Alexander Forbes. At this rate, the income from a level annuity would be slashed to less than half, in real terms, within eight years.

One way of beating inflation is to go for an escalating annuity, which will increase the payout as you get older. However, you start off with a much smaller annual income than with a level annuity.