Borrowers hit after interest base rate rise

The Bank of England brought unwelcome news for borrowers this week as it raised base interest rates for the first time in two years.

The cost of borrowing was increased by 0.25 percentage points to 4.75 per cent. Rates had been static at 4.5 per cent since last August.

The rise comes on the back of recent strong economic signals. Energy and commodity prices have soared to record levels and the property market has heated up again. The rise was therefore considered a pre-emptive move to ward off greater inflationary presures.

But despite these signs, most market commentators were caught off guard by the rise.

The majority of lenders, mortgage brokers and economists had expected any hike to be delayed until at least the end of this year. London-listed equities, UK gilts and short sterling futures all fell on Thursday in response to the rise.

Mortgage lenders and brokers were the first to attack the bank’s decision.

Nick Gardner, director of Chase De Vere Mortgage Management, said: “First-time buyers have been struggling for some time and this will only make life harder for them.”

Paul Smith, chief executive of Haart estate agents agreed, saying: “The current economic situation is not strong enough to justify a rise in rates. This could significantly dampen activity in the market.”

Meanwhile, Peter O’Donovan, mortgage manager at Bestinvest, expressed concern over the impact of the rise on house repossessions: “It’s too early to panic but given repossessions have been soaring during a period of flat interest rates I fear today’s base rate rise might prove to be the straw that breaks the camel’s back.”

Individuals with tracker mortgages, which are linked to the base rate, should prepare themselves for a hike of 0.25 percentage points on their monthly payment. On a £150,000 interest-only tracker mortgage, with a rate of 4.5 per cent, this would equate to a monthly increase of £31.25.

Borrowers with standard or discounted variable rate deals could be hit even harder.

James Cotton, mortgage specialist at London & Country, says: “It would be no surprise if lenders passed on bigger rate rises (than 0.25 of a percentage point). Lenders’ margins have been squeezed and they could take this opportunity to widen them.”

Brokers also warned that lenders could push up the cost of fixed-rate deals.

Ray Boulger, senior technical manager at John Charcoal, expected a number of mortgage lenders to withdraw their fixed-rate offers over the next couple of weeks and relaunch deals at a slight premium, maybe 0.1 or 0.2 percentage points higher.

Fixed-rate deals reflect “swap rates” – the rates set by the money markets that determine the levels of fixed-rate deals.

These have risen significantly since the start of the year and some lenders have already increased the cost of their fixed-rate deals as a result.

Some of these more recently launched fixed-rate offers are likely to remain open to new borrowers at least for a number of weeks.

But Cotton advises: “If you are thinking of buying a property now then don’t hang around.”

According to Purely Mortgages, the best fixed-rate deals on the market are currently Portman’s initial rate of 4.49 or 4.69 per cent, depending on the arrangement fee, and Nationwide’s 4.89 per cent.

Also, if you are likely to be affected by higher mortgage repayments then it could be a good time to consider remortgaging.

“Now would be an opportune time for homeowners to review their existing mortgages and question whether moving to another lender could . . . offset the additional payments resulting from the rise,” says O’Donovan at Bestinvest.

The flipside to the rise, however, is better returns on saving accounts.

Adrian Coles, director general of the Building Society Association, says: “The rate rise could be beneficial for savers as cash deposit accounts become more attractive.”