Mortgage costs go up as rate cuts look unlikely

Fixed rate mortgage costs are starting to creep up and variable rates could soon follow, as the latest unemployment statistics reveal today that further interest rate cuts by the Bank of England are unlikely.

Halifax and Alliance & Leicester are two of the main lenders who have, in the last week, increased their fixed rate mortgages. This follows similar moves by Abbey National, Cheltenham & Gloucester, Woolwich, Bristol & West and Natwest, all of which announced fixed rate increases of between 0.1% and 0.35%.

According to today's data from the Office of National Statistics (ONS), average earnings growth rose to 5.2% in the three months to April from 5.1% in three months to March. Significant rises in the public sector have predominantly been behind the rise, as teachers and nurses see their pay pushed up.

The rises are well above the Bank of England's desired 4.5%, which means it is even less likely to cut interest rates below the current 5.25% - and thereby risk pushing inflation up - at its next meeting on July 5. Today's figures follow hot on the heels of yesterday's news that inflation is up higher than expected at 2.4% - only just under the 2.5% Bank of England target.

Instead, many economists are suggesting there could be a rate increase by the end of the year, meaning that homeowners with variable rate loans could also see their mortgage costs increase. Recent fixed rate movements have less to do with interest rate decisions and more to do with the fact that money market rates - on which most fixed rates are funded - have been edging up since March.

Fixed or variable rate?

Ray Boulger, senior technical manager of mortgages at John Charcol, is advising homeowners to take advantage off fixed rate deals and to do it fast. "Strong competition between lenders combined with reductions in the base rate have meant that borrowers have benefited from cheaper fixed rate deals. Now, with lenders facing tighter margins, borrowers are no longer being spoilt for choice on low fixed rate deals," he said.

However, Mr Boulger believes it is too early to say whether interest rates will definitely rise by the end of the year, thereby affecting variable rate mortgages, although he does concede that the chances of them falling further are relatively small. He points out that one other important factor affecting interest rates is the strength of sterling.

"The fact that sterling may be weak is clearly one reason people are saying interest rates may go up by the end of the year," he says. "However, there are increasing signs that Labour won't go for a referendum in the short term, if at all, and this will help sterling to recover and thereby help to alleviate potential problems of inflation."

The recent uncertainty over the direction of interest rates has left those with variable rate mortgages feeling edgy. However, as Mr.Boulger points out, with fixed rates edging up and variable rates having just dropped following the last rate cut, the average short-term discount rate is still 0.5% lower than the average fixed rate.

"If you are on a variable rate mortgage and you can afford to ride any rises in interest rates then you may be better off staying with that loan," says Boulger. "However, if rates were to move up and that would put you in difficulty, now would be the time to moved to a fixed rate deal."