Is your mortgage set to rise?

Borrowers got a shiver down their collective spine this week after a shock rise in inflation prompted concerns about possible increases in mortgage interest rates.

Confusing economic indicators - including a fall in the unemployment figures plus an unexpected drop in average earnings - have com pounded worries, leaving many people wondering if they should hedge their bets and sign up for a fixed rate mortgage now while there are still good deals on offer. How ever, Ray Boulger of mortgage brokers Charcol says the inflation figures should give "no immediate cause for concern".

He adds: "If you look behind the alarming headlines the Bank of England was saying nothing new."

The surge in inflation from 1.9% to 2.6% in January - which broke through the government's 2.5% target for the first time since 1999 and was the single largest monthly increase since the Gulf war in 1990 - has been played down by Bank of England governor Sir Eddie George as "to some extent erratic."

Ray Boulger says: "Look at what is going on in the economy as a whole. Unemployment figures are down again, which is bad for interest rates, but then the earnings index is also down, which is good for them. It's very difficult to predict right now."

Mr Boulger sees little chance that lenders will react by withdrawing or increasing rates on fixed mortgages. But Savills Private Finance, another mortgage broker, warns that if concern about interest rates pushes up demand for fixed rates in the coming weeks, the cash lenders have at their disposal to fund current fixed rate deals could dry up quickly.

"The fact is, if you are wavering you ought to decide to take out a fixed-rate mortgage now," says a Savills' spokesman. "There are still some good deals around at the moment."

For anyone particularly nervous, Charcol recommends a three-year deal which caps the maximum rate a borrower will pay at 5.99% until April 2005. It also has a 1.5% discount off the lender's standard variable rate, which results in a current pay rate of 4.15%. Up to 95% can be borrowed and a free valuation is offered but redemption penalties apply for the three-year period.

Savills has an exclusive five-year capped rate mortgage linked to the Bank of England base rate with an initial pay rate of 4.75%. The margin above the base rate (currently 4%) is guaranteed to be no more than 0.75% for the life of the mortgage. The maximum payable until April 1, 2007, is 5.99%.

Borrowers can also pay off up to an additional 10% annually without penalty and the deal is available for loans up to 95%. However there is a redemption penalty of 3% for the capped term.

London and Country mortgage brokers are advising anyone worried about being locked into a long fixed period to take a look at some of the two-year deals around. "It's difficult to predict what's going to happen but first-time buyers who may be stretched, and anyone who is nervous about rates should be looking at fixed rates now, but not moan about it if rates don't actually go up," a spokesman says.

An improvement to the abysmal return most savers have seen recently could be the upside of any increase in interest rates. Moneyfacts, the interest rates bible, says that while the banks have not reacted in the immediate aftermath of this week's surprise inflation rise, any future base rate increase by the Bank of England, could see some revise their rates.

"There are rumours that base rates will go up when the monetary policy committee revisits them at the beginning of March. But this is all conjecture at the moment and even if they do go up, it's likely to be by just a quarter of a per cent.

"We would not have expected savings rates to increase on the back of a rise in inflation. They are always more likely to be linked to base rates. What we can be sure of is that institutions will be taking note and what has happened will be in the back of their minds."

Another potential beneficiary of upward shifts in interest rates is annuities, which have suffered from a prolonged period of low yields on gilts. But the Annuity Bureau says there has been little evidence this week of any immediate improvement.

"There is a sign that if interest rates go up then yields will benefit," a spokesman says. "But these things never happen immediately and ironically, we've seen yields actually go down in the past few days."