What goes up ... must come down

Homeowners without fixed-rate loans should brace themselves for another rise in homeloan costs, but not all economists think it will come this week.

The Bank of England's Monetary Policy Committee meets on Wednesday to decide whether to raise the bank base rate from 6 per cent. The MPC's decision will be announced on Thursday.

The base rate has already increased from 5 per cent last September and economists believe it will go higher yet but are uncertain whether the next step will come immediately.

Michael Saunders at investment bank Salomon Smith Barney says the strength of the pound, and the latest figures on gross domestic product, released on Friday, have convinced him otherwise. 'I was going for a hike but, with the pound and GDP where they are, I am going for no change.'

Dharshini David at HSBC agrees, although she predicts that rates will peak at 6.5 per cent.

David Brickman at PaineWebber says: 'I'm going for a 0.25 per cent rise but it's pretty close.'

He believes the economy is now slowing down but thinks the monetary authorities may choose to raise rates again 'to get it over and done with'.

Steven Pearson, an economist with the largest mortgage lender, Halifax Bank, is also plumping for a 0.25 percentage point rise.

One of the many factors that the Bank of England will be considering is the outlook on house prices and statistics due out from Halifax and Nationwide this week. Pearson says the market is slowing, but not at the rate the Bank had included in its forecasts of future inflation.

Mortgage adviser Patrick Bunton says activity in the mortgage market has slowed, but he is nevertheless predicting that mortgage rates will rise this week. 'I think we will see a 0.25 per cent rise in base rate and the same on mortgages.'

A rise of 0.25 percentage points would raise the standard variable rate at Halifax, and most other major lenders from 7.74 per cent to a whisker below 8 per cent. For Halifax borrowers this would raise repayments on a £50,000 25-year repayment loan by £8.29 a month to £389.99 a month. On a £100,000 loan, payments would rise by £16.60 to £779.99.

Bunton believes that regardless of what happens this week, people on variable rate loans should be trying to cut costs. Competition in the market remains fierce - 'there is a scrap going on for market share' - and there are attractive deals available at lower than the variable rate.

He does not recommend five-year fixed rates because borrowers could end up paying too much because rates will come down again within that period.

But two-year fixed rates are attractive, and two-year discounts even more so. Staffordshire building society is offering a 2.01 per cent discount, which has a starting rate of 5.49 per cent and there are no early redemption penalties. National Counties has a three-year discount of 1.4 per cent to give a starting rate of 5.79 per cent and there are no redemption penalties after the three years.

Bunton calculates that someone with an £80,000 mortgage paying 7.74 per cent would save £130 a month by switching to the National Counties deal. This works out at almost £4,700 over the three years.

'Anyone paying the variable rate is shredding money.'

Ray Boulger at broker John Charcol says it is difficult to predict the outcome of this week's rate decision by the MPC. 'It's a particularly difficult one to call. My gut feeling is that the rate will go up a quarter of a point but it's not something I want to put money on.'

Even if homeloan costs do go up this week, the good news for home owners is that the end is now in sight for rises.