Nationwide tips scales in favour of the savers

Millions of borrowers are counting the cost of the first rise in interest rates for almost four years. Many Nationwide mortgage holders may well feel hard done by because they've been hit with a 0.35% increase in their borrowing costs - even though the Bank of England only raised rates by 0.25%.

Some may feel doubly aggrieved bearing in mind Nationwide only passed on 0.1% of July's quarter-point interest rate cut to its borrowers.

But if you're one of Nationwide's nine million savers there's good news: the building society is increasing all its variable rate savings and banking rates by "at least" 0.25%, with two popular accounts enjoying a 0.5% increase.

Thursday's 0.25% base rate rise affects anyone with a standard variable rate, discounted or base rate tracker mortgage. But it will be welcomed by hordes of savers fed-up with rock-bottom returns.

The National Consumer Council says this week's announcement from the Bank of England is "a wake-up call for the one in five people on the edge of the debt precipice". It adds: "Now is the time to change our spending habits, reassess our budgets and start to live within our means."

Here we look at the impact of this week's decision:

Mortgages

Nationwide building society was the first big lender to act, surprising many by hitting at least 500,000 of its mortgage customers with a 0.35% hike in its standard rate (the "base mortgage rate").

This means that while the Bank of England base rate is now the same as it was at the start of July - 3.75% - Nationwide's base mortgage rate, then 4.64%, is now 4.89%.

Simon Jones at mortgage broker Savills Private Finance says Nationwide's decision is "curious". About half the society's 1m borrowers are on the base mortgage rate, with the rest on discounts, fixed rates and base rate trackers.

However, as the society points out, its base mortgage rate will still be about 90 basis points lower than most of its major rivals, assuming they replicate this week's rise.

So is this the first of many interest rate rises? The City's view is that the base rate will rise to 5.25% by the end of 2004 - that is another six quarter-point rises - but this could well turn out to be on the high side, says Ray Boulger at mortgage broker Charcol.

His message to those looking to take out a mortgage is that fixed rate deals now look expensive compared to discounted rate and tracker loans.

Simon Tyler at fellow broker Chase de Vere Mortgages think the base rate will rise to 5% (which would mean a typical standard variable rate of roughly 7%) before coming back down again. He says: "The last of the sub 5% five-year fixed rates will soon be gone, but we are recommending Leeds & Holbeck's 4.99% five-year fix. The deal has no redemption penalties at any time."

Savings

Nationwide announced it will be upping all its variable rate savings and banking rates by at least 0.25%, with its instant access cash ISA and "e-Savings" accounts both enjoying a chunky 0.5% rise. Both accounts will now pay 4% gross. "Over two million savers will get an increase of 50 basis points," says the society. Other banks and building societies will reveal savings rate changes in the coming days and weeks.

Annuities

According to specialist IFA the Annuity Bureau, the rise will have little if any impact on annuity rates. It says people should not delay buying their annuity in the hope of an annuity rate rise. "The highs of the 1990s are extremely unlikely to ever return."