Borrowers urged to prepare for another rise

The Bank of England took no-one by surprise when it raised interest rates by a quarter point to 5 per cent this week.

The rise was widely – if not unanimously – predicted by economists as inflation has remained above its target level and house prices have continued to accelerate.

Interest rates are now at their highest level for five years.

But even though banks were prepared for the hike, they will not necessarily be quick off the mark to pass the rate rise on to savers. At the time of going to press yesterday, only a handful of lenders had raised the interest rates on their savings accounts.

National Savings and Investments, the government-run group, increased the rate on its direct individual savings account (Isa) by 0.25 percentage points to 5.55 per cent.

Marks and Spencer Money also passed on the full rise to its Isa customers. Icesave, the Icelandic bank, the Post Office and The AA also increased interest rates across their variable rate savings accounts by a quarter point.

The news was less favourable for homeowners, who now face further rises in their monthly mortgage repayments.

According to Moneyfacts.co.uk, the comparison website, the monthly repayment on a £150,000 tracker mortgage with a rate of 4.75 per cent will now rise £21.71. For an interest-only mortgage on the same terms the increase will be £31.25.

The quarter-point increase is likely to be effective immediately on the majority
of tracker loans. Rises on other variable mortgages might take longer to filter through but borrowers with standard or discounted variable rates could be hit even harder.

After August’s quarter- point interest rate rise, a few lenders increased their standard variable rates by more than a quarter point and some could do the same again.

Jonathan Cornell, technical director at Hamptons International Mortgages, a broker, says: “Most of the increases to people’s mortgages are relatively modest but after August’s increase this should start to hit
borrower’s disposable income.”

Nick Gardner, director of Chase De Vere Mortgage Management, says: “The rate rise will stretch affordability for homeowners and buyers even further, especially for first-time buyers and many buy-to-let investors who
have only just been scraping a profit on their investments.”

First-time buyers looking for a fixed-rate mortgage could also see more of the cheapest deals being withdrawn from the market. Lenders including Halifax, Alliance & Leicester, Abbey and Scottish Widows have already raised their best rates on fixed-rate deals.

However, intense competition among lenders is likely to keep a lid on rate hikes and brokers say there should still be plenty of mortgage deals on offer around the 5 per cent mark.

There are also still some two-year fixed rates available below 5 per cent but most of these are likely to be withdrawn in the coming days, so borrowers need to act fast to secure the best deals.

Only one lender – Giraffe Mortgages – has a five-year fixed-rate below 5 per cent, although this is expected to be withdrawn shortly.

The interest rate rise is also likely to put the brakes on house price inflation.

Ray Boulger of John Charcol, the mortgage adviser, says the August rise has so far had little impact on the housing market.

“August’s quarter-point rise, the first in two years, had little impact on consumer spending or confidence but a second rise coming in quick succession will be different,” he says.

Michael Coogan, director general of The Council of Mortgage Lenders, says: “The rate rise might mark the start of a cooling down in the housing market but this is not necessarily a bad thing.

“This year has seen record levels of mortgage lending – almost on a monthly basis – and modest increases in mortgage costs will help to maintain a sustainable environment.”

The rate rise is expected to increase the pressure on homeowners outside London and the South East, where the market has been flat for some time.

Warren Bright, chief executive of Propertyfinder.com, says: “The housing market is being driven by London but people outside the capital may find higher rates much harder to swallow. Aggressive rate rises over a sustained period could destabilise the whole market.”

The big question now is whether there will be a further rate rise in the new year.

Coogan says: “Borrowers should be warned that financial markets are expecting yet another rate rise by next spring and now is the time to take action to protect themselves.

“Borrowers should be factoring into their finances
the effects of at least one more rate rise, and making sure that they are shielded from any risks this might bring.”

The CML says borrowers can do a number of things to protect themselves against further interest rate rises.

Aside from taking out a fixed-rate mortgage they can mitigate the effect of any change in their financial circumstances by taking out mortgage protection insurance, which covers repayments in the case of illness or redundancy.

If you do want to lock into one of the current best
fixed-rate deals you should apply for the loan as soon
as possible even if you are not yet ready to move. Mortgage offers are generally valid for around three to six months.