What does the rate rise mean for your mortgage?

Alright, so we may have got a bit carried away. Everyone kept telling us borrowing had never been so cheap, so we all started spending like it was going out of fashion - and, boy, was it fun. But now, of course, it's time to start paying. According to the Liberal Democrats, British consumers have racked up as much borrowing between them as the total external debt of Africa, Asia and Latin America combined.

On mortgages alone, we borrowed more than ?270m in 2003, almost ?121m of which was through remortgaging. For the majority of householders, mortgage repayments are likely to be the biggest single outgoing each month. And as today's 0.25% interest rate rises kick in, for anyone with a mortgage linked to the Bank of England base rate, that chunk of income is about to get bigger.

It isn't time to panic yet - at 4%, Bank of England base rates are still very low, particularly compared with the 1980s peak of 15%. According to the Council of Mortgage Lenders, the quarter point increase will add around ?14.50 a month to the average ?100,000 mortgage. And, according to Britain's biggest mortgage lender the Halifax, even if rates hit the forecast 4.5% by the end of 2004, mortgage borrowers will be paying out just 15% of their income on mortgage repayments, compared with a long-term average of 21%.

But now is the time to think about making sure your deal is the best one you can find, since the impact of today's base rate increase will not take long to hit.

Many homeowners should currently be asking themselves whether now is the time to get a fixed-rate mortgage, where interest rates are set from the start for a specified period of time, usually around five years (although it can be up to 25 years). This is the only way to protect yourself fully from any further interest rate rises, and after all, says Matthew Wyles, a director at Portman building society: "There are some excellent fixed-rate deals around and, at the very least, those borrowers with heavy mortgage commitments should seriously consider the peace of mind and security that a fix can bring in these uncertain times."

And Ray Boulger, technical director at brokers Charcol, says: "Lenders will certainly pass the full rate increase on to borrowers, and some will add more." So if you are paying a variable rate of interest, either on a tracker mortgage, a discount deal or the lender's standard variable rate, expect to see your monthly payments rise.

David Hollingworth of mortgage brokers London & Country says: "Anyone who is still on a standard variable rate (SVR) is in a no-win situation. They will already be paying higher than necessary, and will now have to pay even more.

"With a fixed-rate mortgage, no matter what happens to interest rates, your payments won't change. This gives a lot of security to people who just want to know how much they will have to repay each month."

However, the cheapest of the cheap deals are already gone. Lenders have been forecasting base rate increases for some time, and have been factoring those changes into their mortgage rates. And while long-term fixed-rate deals are just what some households need, since you have the security of knowing how much you will pay for your mortgage for five, 10, or even 25 years, they can also have a downside.

Suppose you take a fixed rate deal at, say, 5.5%. While interest rates are increasing it will feel like a very competitive deal. But if rates fall and you want to change to a cheaper deal in the future, you might find yourself saddled with considerable penalties and effectively prevented from taking advantage of lower rates available elsewhere. "Be aware of any charges, as many long term deals can be really quite inflexible," warns Mr Boulger.

If security isn't your main concern, and your priority is to keep your monthly payments as low as possible, then a discount mortgage is probably still your best bet. "Many discount deals available at the moment are a lot cheaper than the fixed rates," says Mr Hollingworth.

At the time of writing, Alliance & Leicester, for example, has a mortgage with a 2.15% discount from its SVR for two years, currently charging 3.64%, while the cheapest two-year fixed-rate mortgages currently hover between 4.5% and 5.5%.

"They will go up by at least a quarter of a per cent, but the cheapest deals will still be with discount and tracker mortgages," says Mr Boulger. Although, Mr Wyles cautions: "Though cheaper, variable-rate mortgages are for those hardy souls who are willing and able to take some pain later on."