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Base line tactics

Borrowers on tracker mortgages have already seen their monthly payments rise after the Bank of England’s quarter-point increase in base rate.

Lenders are also starting to feed the rise through to borrowers on standard variable rate loansNationwide group economist Fionnuala Earley says: “The impact of a single rate rise is relatively small. On a typical first-time buyer loan, the monthly mortgage payment would increase by 17.”

Halifax also says the immediate impact will be minimal. A spokesman says: “It will have an effect but it will not be that big. On a loan of 100,000, if the SVR increases in line with the base rate rise, then borrowers will see a rise of around 16 a month.”

Figures from the Council of Mortgage Lenders say the average house price is now almost 200,000. On a loan of this magnitude, the average rise will be more like 30 a month.

The Halifax has already passed the increase on to borrowers with trackers and SVRs and is unlikely to be the only lender to do so.

Co-op Bank, Buckingham Building Society and Nottingham Building Society had already increased their SVRs in anticipation of the Bank of England’s move.

Money Supermarket head of mortgages Louise Cuming says: “Any borrower paying the standard variable rate with their lender really should take action to review their borrowing.

“They should approach their existing lender to see if they can transfer to a more competitive rate. If that is not possible, they should consider a remortgage to negate the effect of this rise.”

The popularity of fixed-rate mortgages in recent years means that the numbers of people affected by the rate rise is going to be smaller than it would have been in the past. The last two years have seen up to 50 per cent of borrowers opting for the security of fixed rates and at times this figure has been as high as 70 per cent of all loans taken out.

John Charcol senior technical manager, mortgages, Ray Boulger, says: “Half of all people are not going to feel any impact from the rises. The other 50 per cent will feel an impact but it should be affordable.”

But fixed-rate borrowers have not been entirely shielded from the increases. Earley says many lenders had already increased the rates for fixed rates. She says: “Money markets had anticipated a rise so fixed mortgage rates had already risen to around 5.2 per cent from 4.8 per cent in early April.

“The rate rise will affect demand at the margins and will cause some people to abandon plans, at least for the time being.”

London and Country communications director David Hollingworth says any reduction will only be at the fringes of the market.

He says: “Around 20 a month is not the difference between paying the mortgage and falling into arrears.”

But Boulger says: “If people get nervous that we will see one or two or more increases then they will start to pull in their horns.”

There is a chance that this in not a one-off increase. Bank of England governor Mervyn King has warned that further increases might be needed and two investment banks, UBS and Credit Suisse, are predicting further rate rises.

Credit Suisse says: “On balance, we expect another 0.5 per cent increase by the middle of next year. It takes more than 0.25 per cent to make much difference to anything. The Bank of England’s model suggests that it reduces inflation by less than 0.1 per cent.”

Boulger believes that borrowers should move fast as he expects many lenders to raise their rates by 0.1 per cent. He says: “If people are nervous, they should have a fixed-rate deal and should get in quick before lenders increase these rates further.”

Lenders are also setting out longer-term fixed-rate deals Despite the monetary policy committee’s decision, interest rates are still relatively low on a long-term basis .

Leeds Building Society and Woolwich have brought out new 10-year fixed rates at 5.19 per cent and 4.98 per cent respectively.

Leeds Building Society product development manager Stuart Fearn says: “It is clear that customers want to lock in good value in a rising rate environment and this is an ideal opportunity.”

Boulger says if you believe there will be no further rate rises, then tracker mortgages can still offer significant savings.

He says: “You need base rate to get up to 5.25 per cent before trackers stop being value for money.”

“As far as fixed rates are concerned, any rate below 5 per cent is worth considering.”

Hollingworth says there is value to be found for people willing to tie themselves to a long-term rate. He says: “Some of these deals are on a par with two-year and five-year deals. If you think that interest rates are going up, then this could be a cracking deal.”

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