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No quarter

The cumulative effect of recent rate rises may be too much for some borrowers.

The timing of last week’s base rate rise seemed to catch many mortgage lenders unaware and it can be certain that borrowers will also have been surprised at an increase so early in the new year.

A rise in rates had been on the cards but most industry commentators had been predicting any increase to be implemented in February at the earliest.

The size of the rate increase, from 5 to 5.25 per cent, will not of itself have tipped many people over the edge. Coming so soon after the last increase and after Christmas, when many people can rack up considerable debts over a short period, may make the first couple of months slightly more lean than they were expecting.

There is, however, a real danger that some borrowers will begin to suffer the cumulative effect of such rate increases. Interest rates have been increasing steadily by a quarter of a per cent here and a quarter of a per cent there since they reached a low point of 3.5 per cent in 2003 but the rate at which the increases are coming through seems to be speeding up.

This latest increase is the third in six months and many analysts predict that a further quarter point rise is on the cards for the first half of this year.

At this rate of increase, even the most cavalier of borrowers will start to notice that the costs of borrowing have increased and the small, but increasing, number of borrowers who stretched themselves to the limit to afford to buy housing in the first place may find one increase after another just too much to bear.

Citizens Advice is already warning that it is seeing a rise in the number of people who are falling behind on their mortgage payments and says the latest increase could spell disaster for those people whose borrowing is balanced on the very edge of affordability.

With the average cost of a house in England and Wales now in the region of £200,000, the latest increase will have added something like £29.32 a month to a repayment mortgage. If this increases by another quarter per cent, the borrower will be paying an additional £58.99 a month more than at January 1 this year. Over 12 months at this higher rate, a borrower could be paying an additional £707, which is not an inconsiderable sum.

No one is calling for the Bank of England to curb the rate rises, at least not yet. However, a salutary lesson may be unfolding across the Atlantic as mortgage lenders and borrowers feel the impact of a prolonged period of interest rate increases.

From a low of 1.75 per cent in 2004, the Federal Reserve increased interest rates steadily three or four times a year until it reached the current rate of 5.25 per cent in the middle of last year.

This has had the desired effect of taking the heat out of what was a booming US housing market but there are now strong signs that this has gone too far.

Repossessions and late payments on mortgages are increasing and, in a worrying development for UK lenders, three mortgage businesses have closed. Mortgage Lenders Network USA stopped issuing new loans, Sebring Capital has closed and Ownit has filed for bankruptcy.

In a competitive and increasingly expensive market, the first areas to feel the pinch are the sub-prime lenders which have the highest risk and those which have lent the most against the value of the property.

Any future increases will further stretch affordability and, if not a cause for immediate concern, must be something to keep an eye on.

Gregor Watt is features editor of Money Marketing.

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