Fixed rate mortgages have become more expensive in recent months because, according to analysts, the markets have overreacted to potential interest rate rises.

The cost of borrowing for mortgage lenders, known as the swap rate, has risen which has pushed up fixed-rate deal costs in recent months. The swap rate rose because of an expectation of UK interest rate rises later in the year.

This week the Bank of England again froze the Bank rate at 0.5%, the record low where it has remained since March 2009.

There are two key factors to the prices of home loans; the Bank rate dictates short-term costs while the swap rate is more significant for longer term fixed-rate mortgages as it is based on where interest rates are expected to move in the future.

If the Bank rate speculation recedes then the costs of fixed-rate deals could come down later in the year.

Analysts believe that the markets have been “overreacting” to potential rate rises and this was reflected in the growing costs of fixed-rate mortgages. The speculative movements of the swap rate are often difficult for borrowers to understand when the Bank rate remains steady.

However, there are still very competitive deals available, with some five-year fixed-rate deals starting at 4%.

The number of changes made by lenders to their mortgage rates has accelerated in recently. Those offering smaller deposits need to have an ever more exemplary credit history.

Recent changes have included both Santander pulling its two-year fixed rate deal at 3.09% and ING Direct pulling its five-year fixed-rate deal at 4.49%.

NatWest has increased fixed rates by up to 0.4%. Its best five-year fixed-rate at 50% loan-to-value is now 4.35%, compared with 3.75% approximately four weeks ago.

The Woolwich has increased its fixed and tracker rates by up to 0.31% and Manchester Building Society increased rates by up to 0.31%.

Many fixed-rate deals still require a large deposit, or are only available to people with significant equity in their homes.

Those who can offer a deposit of only 10% of a home’s value need to have “no blips” on their credit history to be given a mortgage at the best rates. Few people can meet these strict criteria.

The other side to all this is that a rising swap rate could mean better news for savers. Lenders, seeing their cost of borrowing rise, might want to attract savers’ cash and so could start to offer better rates on savings accounts. However, the continued record low Bank rate and rising inflation could muffle this benefit for savers.

In a rare sign of optimism in the UK mortgage market, the website Moneyfacts has shown that the proportion of mortgage deals currently available requiring a deposit of 25% or more has fallen to the lowest level since 2009.

Only 46% of mortgages currently on offer now ask for a deposit of that size and analysts believe that the figures indicate some lenders may be relaxing their strict mortgage rationing of the past two years.

However lenders have warned that they still face severe restrictions on their ability to lend to people buying a home.

At the beginning of February the percentage of new mortgage deals that demanded at least a 25% down payment fell below 50% for the first time in exactly two years. However, the size of a deposit is no longer the only method which lenders use to allocate mortgage funds.

So the availability of mortgages is continuing to improve and it is the deals for borrowers with a smaller deposit that are seeing the biggest increase in numbers. However, just because lenders have increased the number of deals available, it doesn’t mean that more mortgages are being approved.

In fact latest figures from the Bank of England (BoE) covering December 2010 show another drop in the number of approvals.

The Council of Mortgage Lenders (CML) has pointed out that UK banks and other mortgage lenders still have to repay £230bn of emergency state funding advanced to them by the Treasury and the Bank of England during the banking crisis of 2008 and 2009.

Along with having to repay loans to commercial lenders, this means there is little prospect of making more money available in the short term to prospective borrowers.

The CML released a statement this week claiming that “the shortage of mortgage funding has left the UK with a dysfunctional market, with restricted choice and competition, particularly for higher-risk customers”.

Separate research from Lloyds bank suggests that falling house prices will continue to choke activity in the market. The bank says nearly 20% of first-time owners did not have enough equity in their properties to move.

Research among its own mortgage customers by Lloyds, which owns the Halifax mortgage lender, found that 9% of those wanting to sell their first home and move up the property ladder, the so-called second steppers, are unable to do so because house prices have fallen since they first bought.

Lloyds sampled 500 of its borrowers who had bought their first home in the past five years. Only 13% said they would cut their asking price if they could not sell for the amount they were currently asking.

This is quite a problem for the UK housing market. With second steppers staying put, the stock for first time buyers is limited no matter if they can get a mortgage or not. Without movement from second steppers, movement on the housing ladder comes to a standstill.