Turning the screw on house buyers

The Bank of England's quarter of a point increase on its base rate - the fourth interest rise in six months - obviously means more of the same for homebuyers, a drip-drip torture that puts extra pressure on the monthly mortgage bill.

Although most home loan companies have yet to announce their rises, it is clear that variable rate loans are virtually sure to go up. Those with tracker mortgages, such as Virgin customers, will see rates jump automatically.

Increases will bite immediately for new borrowers and take effect from March 1 for existing home loan customers.

And whatever the Bank of England's next move, all mortgages, including the 30% of home loan customers with fixed or capped loans, will rise in April when the tax rebate Miras - Mortgage Interest Relief at Source - finally moves into history. The Miras loss varies between around £15 and £20 depending on the interest level of the individual mortgage. A £100,000 interest-only borrower is likely to be paying nearly £100 a month more by April after the Miras loss if this week's rate is passed on in to borrowers in full.

And the current rate rise may not be the last. Ray Boulger of mortgage brokers John Charcol warns: "The Bank of England is looking to control the housing market and inflation. But rates are going to have to rise significantly to have the desired impact."

Higher interest rates should mean that the other side of the equation, the savers, should rejoice. There are typically seven savings accounts for each home loan. But the reality is that savers are likely to emerge with as nearly as much misery as borrowers. On previous experence, they will have to wait longer before they are told what increases will emerge on their accounts. One of the few banks to raise rates to savers is Investec, which increased its Base Plus tracker account by 0.25% to 6.75%. But savers need £2,001 to access this.

And when other savers find out their new rates, they will almost certainly be unhappy. For the banks and building societies have managed for some time to disappoint all their customers by squeezing their borrowers at one end and their savers at the other.

Analysts say it is all in the name of building up margins, perhaps to give existing players a layer of profit fat to protect them against new net-based banking players.

Whatever the reason, customers of demutualised banks such as Abbey National, Halifax, Northern Rock and Woolwich who have held on to their free shares are probably not happy either. This week these stocks hit new lows. Base rates now stand at 6%. And assuming mortgage lenders pass on the base rate gain in full the variable interest rate at market leader Halifax will be 7.74%, or 1.74% above base rate.

Figures from Moneyfacts magazine show that mortgages were only higher than that on one of the previous four occasions when the base rate was 6%. In January 1993, base rates fell from 7% to 6%. The mortgage rate fell to 7.99% in March 1993. The next time rates were at 6% was again on the way down in March 1996. This converted into a 7.25% variable Halifax rate or 1.25% above base rate.

In October of the same year the Bank's base rate was again 6% .This time the Halifax did not respond immediately, but held its interest levels at 6.99% before raising them to 7.25% in early 1997. And when interest rates fell to 6% in January 1999, the mortgage cost 7.45%. Now it looks like a 1.74% margin over base rates.

But the Halifax argues that its margins over all products did not widen in 1998 compared with 1997. It does not yet have figures for 1999.

Savers have not fared better. In January 1993 the Abbey National instant access rate on a £5,000 deposit stood at 4.5% before tax, or 1.5% below base rates. In March 1996 the gap had doubled to 3.1% to produce a gross 2.9%. By October of that year the Abbey had cut their rate to 2.7%, despite base rates standing again at 6%.

The reaction to the January 1999 6% base rate was to slash the instant-access rate to just 1.65%, or little more than a third of the 1993 level despite the same underlying base rate. And now, in the unlikely - on past performance - case that the Abbey passes on the whole of the increase to savers, they would still receive no more than 1.55% on £5,000 before tax.

Savings banks argue that it is fairer to quote 90-day notice accounts for savings at the £5,000 level. Here, thanks to competition from newcomers such as Standard Life Bank, Scottish Widows Bank and, more recently, the Prudential's online Egg, whose instant access accounts beat most 90-day schemes, average rates quoted in Moneyfacts have held up better.

Most lenders are reluctant to discuss rate rises until they announce them. The Abbey National, contented itself with a "reviewing options" statement although it seems set to raise costs for borrowers. But the Nationwide, the biggest remaining building society which has kept its variable rates around 0.5% below the stockmarket quoted lenders, has more ominous views.

It says: " We have to consider our position carefully bearing in mind we believe in the strong possibility that base rates may continue to rise over the next few months. We also have to balance the needs of borrowers and savers."

This could mean an above average increase for Nationwide borrowers next month. Mutuality is no guarantee against margin building. Its current variable mortgage rate is unchanged on a year ago, although base rates have fallen from 6% to 5.75%. And its rates to savers are nothing to get excited about. Its Cashbuilder instant access account is down 0.35% on £5,000 to 2.9%, although it has gone up from 1% to 1.2% on sums from £1 to £500.

Mr Boulger at John Charcol believes that the latest base rate increase "is highly unlikely to deter those who have made the decision to move home". And he forecasts that: "Rates are not going to rocket out of control. I would not be surprised to see an increase in stamp duty at the next budget to help take the heat out of home prices."

He is also optimistic for borrowers. "It is generally predicted that 2001 will see interest rates falling as the UK begins to move in line with Europe," he says.

But a year ago the experts were forecasting exactly the same - for 1999-2000. And rates moved in the opposite direction to their predictions.