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Helen Pow reports on how the base ball is being batted around by the Bank of England.

T he threat of future bank base rate rises is hanging over the property market after Bank of England governor Mervyn King hinted last week of a further 0.25 per cent increase in the summer.

Hamptons Mortgages technical director Jonathan Cornell doubts that the recent 0.25 per cent rise will do much to slow the housing market because the demand for property will continue to outstrip supply.

But he does says that the rise, coming after three other increases, needs to make people think long and hard about whether they can afford to buy the house they want.

He says the extra £15-£30 which the rate rise will add to borrowers’ monthly payments will not have a huge effect and he sees house price inflation cooling of its own accord in the coming months.

Assetz managing director Stuart Law says: “This level of increase will have a mini-mal impact on house prices as a whole due to the fundamental supply and demand imbalances.”

Some mortgage specialists predicted that the May rise would be as high as 0.5 per cent but Cornell says the MPC made the right decision as such an increase would have had a “sledgehammer effect”.

But Highclere Financial Planning partner Alan Lakey says: “Half a per cent would have been a warning signal. By increasing the base rate in dribs and drabs, people will get used to it but if it is a £60 a month difference, they will notice.”

F&C Stewardship fund manager Ted Scott says the increase did not go far enough. He says: “Many people will be expecting another 0.25 per cent rise after the recent rate hike but a bigger than expected 0.5 per cent rise would have been more effective in slaying inflationary pressures than this incremental approach.

“A 50 basis point increase would have shown consumers that Mervyn King and the MPC mean business and that they are serious about nipping the problem of inflation in the bud.

“Instead, with the recent rises in the price of oil combined with relatively high consumer spending and a resilient housing market, neither of which is likely to be greatly affected by this decision, inflationary expectations are likely to continue to dog the economy.”

Lakey believes the MPC’s choice to raise rates by only 0.25 per cent means that another rise is imminent, possibly as soon as July.

But Cornell thinks the MPC will wait at least three or four months before considering another increase. He says a cut in the cost of gas and electricity as well as falling petrol prices mean inflation is likely to fall and the MPC will be under less pressure. The inflation rate did show a decrease last week to 2.8 per cent for April from 3.1 per cent in March.

Many people rushed to secure fixed-rate deals after the January rate rise but those who did not will be feeling the effects of the latest increase.

Cornell says: “The rise will continue to stretch many borrowers to their limits.”

Early redemption charges, which can amount to tens of thousands of pounds, have prevented many people moving to a fixed-rate deal. Some people held off fixing because they believed January’s increase would be the last and that rates would soon start to fall.

Savills director Melanie Bien says fixed deals are becoming more expensive by the minute so people should act fast.

She says: “If people need certainty, they need to act quickly because rates are going to expand further.”

But Bien feels that even people who took out a fixed deal after the last rise were around three months too slow because the rate rise was already factored in.

Lenders have been withdrawing their fixed offers and replacing them with higher rates as swap rates have risen.

Cornell says: “Many borrowers who have not acted before will really start to feel the heat of this rise.”

With 40 per cent of fixed-rate deals coming to maturity in the middle of the year, people who have been cruising along on rates of around 4 per cent will really notice the difference.

Bien says the rise should remind people not to take out a loan they cannot realistically afford and if they are overstretched, they should go for a fixed deal so payments are guaranteed.


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