The rate will be fixed for one year, before the customers are then switched to the group's tracker mortgages, which currently charges 2.29 per cent above the Bank of England base rate, for the rest of the loan.

The group, which is part of Barclays, said the deal was 1.5 per cent lower than its previous rate on the same loan, adding that it believes it is also the lowest rate currently available on the market for either a fixed rate deal or a tracker.

The mortgage is only available to homeowners borrowing between £200,000 and £500,000, while those wishing to take out the mortgage will have to pay at least a 40 per cent deposit.The announcement follows other lenders who are offering increasingly competitive mortgage rates - last week Halifax, Britain's largest mortgage lender offered a two-year fixed rate at 2.99 per cent. NatWest and HSBC have also recently announced new rates.

Andy Gray, head of mortgages at the Woolwich, said: "We are seeing some of the best mortgage rates in a generation. This is down to increasing competition and the falling cost of lending for the banks."David Hollingworth, from broker L&C Mortgages said although the offer was "very encouraging", he warned that borrowers should be aware they are locked in for three years.

"Fixed rates have generally been coming down but its been more of a drip drip rather than being slashed.""The mortgage market has been decimated in the last 18 months so there's not going to be any quick fix solution but at least we can see some lenders out there showing some appetite."

Melanie Bien, Director of Savills Private Finance added: "The only thing is the fixed rate is for a year then it rise significantly to 2.29 per cent above base so that's not particularly attractive."Unfortunately I think we'll only see a handful of lenders do this and they won't get much cheaper. I think borrowers should move now if they want a fixed rate."