Competition has increased in the mortgage market with First Active cutting the cost of its fixed interest rate mortgages for new customers.

The reductions include a 0.2 percentage rate cut in the key one-year fixed rate for new borrowers to 2.54 per cent, the lowest in the market.

The changes, which come into effect immediately, also reduce the two-year fixed rate from 3.84 per cent to 3.58 per cent and the three-year rate from 4.24 per cent to 4.09 per cent.

First Active said in a statement that the reduction reflected the downward shift in longer-term euro interest rates.

Most of the financial institutions increased their fixed rates late last year in response to an increase in long-term interest rates - bond yields - on the financial markets.

However, long-term rates have since eased in response to doubts about the strength of the euro-zone recovery and predictions that, as a result, European Central Bank short-term interest rates are not set to increase for quite some time.

Davy Stockbrokers, in its latest note, has said it believes that, if euro-zone interest rates move at all in the near future, a cut is more likely than a rate hike.

PermanentTSB recently cut its two- and three-year interest rates, and other institutions may respond by cutting their fixed rates.

The one-year fixed rate is an important marketing tool in attracting first-time buyers, according to Mr Peter Bastable, managing director of mortgage broker Simply Mortgages.

He predicted that other institutions may respond to the First Active move by cutting their one-year rates in the near future.

Competition in the mortgage market has intensified over the past year, notably with the increased availability of tracker mortgages.