Rate rise hits homeowners, helps savers

Millions of households are bracing themselves for higher borrowing costs today, following the Bank of England's decision to raise interest rates for the third time since November.

The quarter-point raise, which puts the base rate at 4.25%, was widely predicted, after the failure of the previous raises to check the UK's household spending boom. The latest house price survey from Halifax, released earlier this week, said that prices had climbed a further 1.8% in April. According to the Bank of England's most recent report on mortgage lending and borrowing through credit cards and personal loans, the total amount borrowed by British consumers grew by ?11bn in March.

But borrowers may be forced to put the brakes on their spending after today's announcement. If, as expected, mortgage lenders pass on the full hike to their customers, today's move will cost homeowners with an average ?65,000 mortgage around ?10 month, and first-time buyers, who on average have a loan of around ?100,000, will see their repayments rise by ?15 a month.

While these rises are themselves unlikely to have a serious impact on people's ability to afford their mortgages, homeowners have now seen cumulative increases of nearly ?30 to a ?65,000 loan since November. And if the base rate ends the year at 4.75%, as many economists are predicting, their repayments will have grown by a total of ?50 since rates first began to rise.

Commenting on the Bank's decision, Paula John, editor of Your Mortgage magazine, expressed her concern at this possibility. "While a 0.25% rise may not sound significant in isolation, it actually means that the cost of borrowing has now increased by 15% in just six months," she said. "In a market where many people are already overstretched, this is bound to have a negative impact on mortgage borrowers, and ultimately on the housing market."

However, Mark Hemingway, a spokesman for Halifax building society, believed that, on balance, the rise was a positive thing for consumers, and was unlikely to have an extreme impact on the housing market.

"A growing proportion of homeowners are on fixed rate mortgages," he pointed out. "For 40% of homeowners there will be no change to repayments at all. This is one of the many reasons why the rise will not have a drastic effect on the market. The thing that drives the housing market is confidence, and currently people are confident in their jobs. Unemployment is at its lowest rate in living memory, and despite today's rise, interest rates are historically very low compared with the peak of 10 or 15 years ago. When it comes to mortgages, therefore, there is still a high rate of affordability.

"On the other hand, the move is great news for savers. Remember that for every borrower there are seven savers; they should now take the opportunity to reassess their savings and consider whether their money is in the best place. There are a lot accounts out there offering excellent rates of interest. Interest rate rises are not bad news for everybody."

Despite the fact that the rate rise was widely anticipated, Mr Hemingway said that Halifax was unlikely to make any changes to its savings or variable mortgage rates until June. ""We won't make an immediate decision," he said. "Last month the MPC voted eight to one to hold rates. We need to know what has changed, what information they have that the market doesn't, what factors have lead to the decision before we make changes ourselves."

Abbey National, First Direct, Barclays and the Woolwich, HSBC, and NatWest and the Royal Bank of Scotland all said they were currently reviewing their rates, while Nationwide Building Society said it was "monitoring the market".

However, Cheltenham & Gloucester, part of the Lloyds TSB group, bucked the 'wait and see' trend and became the first of the major lenders to announce it was moving its standard variable mortgage rate up in line with the Bank's increase, from 6% to 6.25%. The rise will take effect from May 10 for new customers and from June 1 for existing ones. Abbey, meanwhile, took the unusual decision of pre-empting the Bank of England's decision, and upped its mortgage rates by 0.25% last night.

Joe Wiggins, a spokesman for Nationwide building society, turned the focus away from the probable mortgage rate rises and concentrated instead on the benefits to savers. "Rising rates are good news for savers," he said. "When rates turned the corner last November, we put up our leading savings accounts by more than the base rate, some by as much as double. Times have been tough for savers for some time - it's good to see them doing well."

However, Ed Mayo, chief executive of the National Consumer Council (NCC), was keen to keep the long-term consumer consequences of rate rises at the forefront of people's minds. "With interest rates likely to continue on their upward path, it's a warning to borrowers to think long and hard before taking on further debt," he said.