Rise puts rates on their way to 5% this year

Millions of mortgage-holders face higher monthly costs after this week's widely expected interest rate rise.

Following the Bank of England's decision on Thursday to lift interest rates by 0.25% to 4.25%, many City experts warned that further rises are on the way, with the Bank's base rate expected to be 4.75%-5% by the end of the year.

This week's rise, if passed on in full, will add £16.67 to the monthly mortgage payments of someone with an £80,000 interest only mortgage - or £12.30 in the case of someone with an £80,000 repayment home loan.

Abbey and Cheltenham & Gloucester, Britain's second and third largest mortgage lenders respectively, were the first big high street names to announce they had increased their standard variable mortgage rates by the full 0.25%, lifting them to 6.25%.

It's probably fair to say that only a minority of borrowers pay the standard rate these days, with those people on fixed rates unaffected, but there are millions currently on base rate tracker and discounted rate deals who will feel the impact.

Although people should have already budgeted for an increase, if you are concerned about further rises you should consider remortgaging to a fixed rate, says Simon Jones at mortgage broker Savills Private Finance.

"Although the majority of lenders have repriced upwards since the last base rate rise, two-year fixed rates are currently available from 4.89% and five-year fixed rates from 5.19%," he adds.

However, Simon Tyler at fellow broker Chase de Vere Mortgage Management says the prospect of further rate rises has made fixed rate deals much more expensive when compared to discounted rates, so the choice is now more tricky.

The cheapest discounts available today have a pay rate of about 3.80%, while many fixed deals have risen above 5%. Some people may want to take a gamble that rates don't rise too much - no more than another 1% - "in which case they'll certainly be better off with a discounted deal".

Like other brokers, he likes Portman building society's two-year discounted deal where you get 2.1% off the standard rate until June 2006, giving a current pay rate of 3.85%. The minimum deposit is 5%.