Northern Rock, the state-owned bank, has reduced the cost of its fixed-rate mortgages but increased rates on its new tracker deals by half a percentage point.

The lender has cut the rates on its new fixed-rate deals by up to 0.70 percentage points as the cost of funding new mortgage lending on the wholesale market continues to tumble.

A two-year fixed-rate deal for up to 75 per cent of a property's value, with a £995 fee, has fallen from 5.69 per cent to 4.99 percentage points.

The Rock is also launching a new one-year fix at a low rate of 3.99 per cent for borrowers with a 35 per cent deposit.

Unlike a similar one-year deal from Woolwich launched last week, there is no extended tie-in. The Woolwich "fix and track" deal, which also has a one-year rate of 3.99 per cent, locks borrowers in for a further two years on a more expensive rate that tracks base.

Fixed-rate deals are set to fall even further after swap rates, the money markets which banks use to fund new fixed-rate lending, fell to their lowest point in years.

Aaron Strutt, of Chase De Vere Mortgage Management, the broker, said: "Funding costs are so low that it is inevitable that more lenders should be able to pass it on to borrowers in the form of lower rates."

Northern Rock also re-entered the tracker market today with new two-year tracker deals at 4.99 per cent, or 1.99 per cent above base, with a £995 fee. The loans are only available for up to 65 per cent of a property's value. Before the Bank of England cut the cost of borrowing at the start of the month, Northern Rock's best tracker rate was 1.49 per cent above base.

The Rock says it has limited the deals to borrowers with sizable deposits because it is focusing on "high credit-quality customers". However, experts warn that the new deals are further evidence that the options for first-time buyers and homeowners with a small amount of equity in their home are increasingly limited.

There are now only 66 deals available for borrowers with a 10 per cent deposit, according to Moneyfacts.co.uk, the financial website. In February there were 1,197.

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