Homeowners will be first to feel the pain

Mortgage lenders are preparing to raise the cost of variable rate home loans for the first time in nearly four years, after the Bank of England's setting of interest rates this week.

If the bank raises the base rate by 0.25 per cent to 3.75 per cent many lenders are expected to pass on the full increase to the millions of borrowers with variable rate loans. A rise of 0.25 per cent on a £100,000 mortgage will cost borrowers about £15 a month. The increase will hit borrowers in December.

The pattern of increases will be mixed, however. Not all lenders cut rates after the last fall in base rate in July to 3.5 per cent.

Ray Boulger, of mortgage adviser Charcol, said: 'All of the lenders who cut their standard variable rates (SVRs) a quarter point, on the last downward movement, will put rates up by 0.25 per cent. The ones that are more difficult [to predict] are those who didn't cut their SVRs at all or by not very much.'

He predicted that lenders would use the move as an opportunity to widen profit margins on their loan books. 'Overall, the increases we see will be greater than the decreases we saw after the last cut.'

Up to half of the new loans taken out this year in the UK have been on fixed rates. Lenders believe this will help to reduce the impact of rising rates on the economy and the housing market.

But industry estimates suggest that among loans overall barely a quarter are fixed. Michael Coogan, director general of the Council of Mortgage Lenders, said: 'It is not as high as you would want for people to be sheltered.'

However, Coogan said he did not expect the trend for a rise in interest rates to have a serious impact on borrowers or the market. 'I think the Monetary Policy Committee [of the Bank of England] will try to avoid a blow to the economy.'

The cost of fixed-rate loans, which are determined by rates in the wholesale money markets, began to rise several months ago and are continuing to rise. Abbey National, for example, is putting up the cost of two-year fixes by 0.6 per cent.

Boulger said that the money markets were now predicting a base rate of 5.25 per cent by the end of next year. This would lead to standard variable rates of about 7 per cent. Fixed-rate funds for two years are still available at 3.99 per cent, but the best deals are disappearing fast.

Boulger questioned the value of getting a fixed rate loan now. He advises taking a flexible, discounted, vari able rate loan, and, to prepare for high costs and build up a payment reserve, saving the difference between the cost of the loan and what it might rise to next year.