First year savings on discounted variable rates have reached their highest level for over a year, reports mortgage lender Your Move, with rates at their lowest since last summer, spurred on by the base rate cut.

The lender’s August remortgage index, tracks first year savings achieved from switching from a £100,000 standard variable rate (presently averaging 6.59%), to the Best Buy rate in different classes.

Mortgage shoppers can now benefit from higher first year savings with discounted rate deals for both two and three years, at £1,930 and £1,770 respectively. Discounted rate full term savings are now at their highest level since before January 2004.

Over the last month, changes amongst discounted rates have been significant, although in comparison to fixed rates they have changed relatively little over the last year. Three year discounted variable rate first year savings have risen by 10% while three year fixed rates savings have not changed.

Savings on fixed rate deals finally fall

At the end of July fixed rate savings reached their highest peak since April 2004 yet during August they began to fall. Despite the lack of movement among fixed rate mortgages this month, first year savings have risen enormously in the last year. This month rolling average upfront fees for two and three year deals have risen by 33% and 25% respectively.

Fixed or Variable?

For two and three year deals, discounted variable rates are now offering the best first year savings. However, fixed rates have the edge on five year deals. Savings over the full term of the mortgage are now virtually the same for fixed and variable rates across the board.

During July, fixed rate deals unusually offered higher savings than discounted rate deals in anticipation of the base rate cut. For the time being base rates are likely to remain around 4.5% so fixed rates are unlikely to change significantly. Following the Monetary Policy Committee’s decision, discounted rate deals fell, bringing their savings back into a more normal relationship compared to fixed rates which had adjusted well in advance of the MPC’s action.

According to Your Move data for August, 87% of new borrowers have taken up fixed rate deals, a slight increase on the 85% recorded in July. Almost half of these borrowers chose 2 year fixed deals, attracted by the extremely low interest rates. This means that 36% of all the mortgages arranged were 2 year fixed rates. Borrowers are still cautiously choosing to fix their mortgage repayments against possible rate increases.

Upfront fees keep rising but exit fees remain steady

Upfront fees for two and three year fixed rates have risen by over 25% over the last month as lenders offset their low rates. Table 3 shows the monthly changes in fees on certain products. Exit fees remained steady in July at an average of £183.

Jon Round, remortgage analyst at Your Move comments: "While discounted variable rate mortgages have cheapened, fixed rates have remained, so far, stable. Borrowers are still preferring fixed rate deals, not least because these fixed rates are likely to rise over the next few weeks due to increasing concerns about inflation which are threatening to scupper further base rate reductions. It may thus still be wise to choose fixed rates despite the immediate savings on discounted variable rates being higher."

"Both fixed and discounted rate mortgages currently offer high first year savings. Savings with discounted rates have shot up over the last month, reaching their highest for more than a year. Although fixed rate deals have changed little over the last month savings with two, three and five year deals have at least doubled since this time last year."

"However, borrowers need to consider the full picture. Although discounted rates offer higher savings this month, fixed rates remain competitive and borrowers on discounted rates need to be fully aware that repayments can increase rapidly if base rates go up."