The move by Nationwide is seen as a calculated measure aimed at rewarding homeowners who are willing to commit to long-term mortgage deals.

From May 16, the company will reduce the rates on its 2-year and 5-year fixed rate mortgages. House purchases will be down 5.95% from the previous figure of 6.10%.

The announcement comes as figures for mortgage lending record a sharp drop in the first quarter among first time buyers and existing home owners.

The UK's biggest building society cut the rate on the nation's popular mortgage deal - the two-year fixed rate - by 0.15 percentage points but reserved a bigger 0.3 percentage point cut for borrowers wanting a five-year loan.

Nationwide is also offering reduced prices to those remortgaging and who wish to take out additional borrowing.

Customers now wishing to remortgage on a five-year loan for £150,000 will now pay £13 a month less, or 0.1 percentage points, than someone on the two-year rate.

All borrowers taking out a two-year loan will also be stung by a higher arrangement fee, up from £499 to £599. Nationwide, however, has reduced fees on five-year fixed rates by £100, from £699-£599.

However, figures released by Council of Mortgage lenders [CML] show that mortgage lending from January to March hit a low 142,000, only marginally above a 140,000 total,  recorded in the first quarter of 1975 and below the 146,000 recorded early 1992 when Britain was in recession.

The new fixed rate cuts are the first significant reductions since the Bank of England injected £50 billion into the markets to boost liquidity.

The decision by Nationwide aimed at encouraging longer-term borrowing is in line with the Government's view that borrowers fixing for longer will help stabilise the mortgage market.

The move is largely seen as a reaction to recent falls in swap rates, the rates quoted on the money markets that determine the cost of fixed rate lending. Yesterday saw another leading lender, Abbey, cut the rate on some of its three-year fixed rate deals.

Melanie Bien, of Savills Private Finance, the mortgage broker, said: "Nationwide's decision to make the biggest rate reduction on its five-year fix, as well as reducing the fee, suggests that it is trying to tempt borrowers into longer-term fixes.

This will help lenders such as Nationwide manage demand: if everyone opts for two year fixes, in another two years there will be a similar situation to the one we have now with thousands of borrowers coming off two year deals. It makes sense to spread the burden by shifting some of these borrowers onto longer fixes."

However brokers gave warning that borrowers should remain vigilant as rate cuts are likely to only apply to a minority of homeowners and could be offset by increases in fees. For instance, Abbey also increased the fee on one deal yesterday by £500.

Under the new reduced rates, Nationwide borrowers who are changing mortgage will be offered an exclusive 5-year fixed rate with no fee at 5.95% compared to the previous figure of 6.15%.

The company says that home buyers will get a better deal with the new range of reduced fixed rates for house purchase.

Despite the move taken by Nationwide to cut down its fixed rates, CML figures however, show that in March, new home loans for first time buyers and new home owners plunged by 48% compared to the same month last year.

The figures mirror a gloomy forecast reported by the Royal Institution of Chartered Surveyors [RICS] which show that an average 18.3 property sales per month, down from 22.2 in March and the worst since the lowest figures set in November 1992.