Rates on savings bonds broke the 7 per cent barrier this week as banks and building societies fight for customer deposits in the wake of recent credit market tightening.

Fixed-rate savings are now offering their highest returns in six years, with Stroud & Swindon Building Society paying 7.05 per cent on a one-year bond and Standard Life Bank offering 7 per cent fixed until March.

More than 20 banks and building societies have improved their fixed-rate deals in the past two weeks, according to Moneyfacts, the rate monitor. Fixed-rate guaranteed bonds issued by insurers are also offering returns worth as much as 7.6 per cent gross to higher rate taxpayers.

Rachel Thrussell, head of savings at Moneyfacts, says: “The savings frenzy of last week has continued at full strength… With the credit crunch still biting, lenders are looking for alternative ways to fund mortgage lending and it seems increasing deposits has been the first port of call for many.”

But this may be about as high as rates go for now, say experts. “It’s hard to see rates going higher because money market rates appear to have peaked,” says Ray Boulger, senior technical manager at John Charcol mortgage brokers.

Thrussell adds that there could be further small increases by banks looking to climb to the top of “best buy” tables, but she would be surprised to see many more rises.

Kevin Mountford, head of savings at Moneysupermarket.com, the online comparison service, says: “My message is to act now and make the most of these rates as they could be reaching a temporary high. It will be interesting to see if some of the bigger players follow in an attempt to maintain ‘best buy’ spots and market share.” He suggests lenders that fail to raise the funds they need from fixed-rate bonds may yet have to increase returns on variable-rate accounts.

Savers should remember that the present market-leading offers could be withdrawn as soon as banks and societies have attracted required monies, so those waiting for better deals may miss out. Stroud & Swindon expects that its 7.05 per cent bond will still be available until at least next week, but says its website received 20,000 visits just one day after launch. The society is seeking to raise about £50m.

The 7.6 per cent guaranteed bond rate quoted by financial adviser Baronworth Investment Services from Pinnacle, the insurer, is expected to remain available until the end of the coming week. This rate is on a six-month bond, although most of the latest best buys involve tying up money for a year.

Some savers may want to retain more flexibility with their funds. Experts say they might consider splitting their money between one of the latest fixed-rate deals while keeping the rest to invest at short notice.

The recent rate rises increase the attractions of cash as a safe haven for investors running scared of the stock market. They are also an unexpected bonus for savers who have already been enjoying higher returns after the past year’s series of base rate rises to 5.75 per cent. There have been growing expectations that base rates may now have peaked and that, in the wake of the credit market’s difficulties, the next move may be down.

But the latest flurry of competition could provide an opportunity for mortgage borrowers to earn a higher return on savings than they are paying on their home loan.

“With savings rates reaching such heights, the traditional advice to overpay as much on your mortgage as frequently as you can may have gone out of the window,” says Thrussell of Moneyfacts.

Despite talk of rising mortgage rates in the latest credit market turmoil, these increases have so far been focused on new home loans and subprime borrowers. This week saw a number of small increases in tracker loan rates, but also some reductions on fixed-rate mortgages. Typically these new rates start at around 5.5 per cent.

Many existing mortgage borrowers could still be paying fixed rates under 5 per cent – and, in some cases, as little 4 per cent, says Boulger of John Charcol. So, instead of using spare cash to pay down their mortgages, such borrowers may be able to lock in a guaranteed profit on that money by investing in a fixed-rate bond paying 7 per cent.

To work out the possible benefit, borrowers need to compare their mortgage rate with the after-tax savings return they would achieve. The benefit stands to be most attractive for a non-taxpayer – for example, where savings are held in the name of a non-earning spouse. Where savings are held by a basic rate taxpayer – for whom a 7 per cent one-year return is reduced to 5.6 per cent after tax – there might also be a worthwhile rurn to be made, depending on the mortgage rate.

Boulger estimates that in some cases the arbitrage could be worth as much as £1,000 to £2,000 to borrowers over the coming year. Potential beneficiaries could include couples who are currently remortgaging at a relatively low loan-to-value who are prepared to borrow perhaps another £100,000 or so to put in one of the new savings bond deals. Similarly, borrowers with offset or other flexible loans might draw down equity to invest in a bond at a profit. It might even pay the mortgage-free to become borrowers again.

“It could be a relatively nice amount of money over a short period for taking no risk,” says Boulger, adding that as well as comparing savings and mortgage rates, borrowers would also need to take into account extra loan fees that could be incurred.