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Last Updated: Thursday, 6 May, 2004, 11:09 GMT 12:09 UK
Q&A: Interest rate rise
The Bank of England raised interest rates on Thursday by a quarter of a percentage point to 4.25%. BBC News Online explains what this means for your personal finances.

I have a big mortgage, is it time to hit the panic button?

The quarter percentage point rise alone is unlikely to push your finances over the edge.

Interest rates are still low by the standards of the past 20 years.

In recent years, more Britons have chosen mortgages where the interest rate is fixed for several years instead of variable rate deals, which are very susceptible to Bank of England base rates moves.

As a result, the large numbers of people with a fixed-rate deal will be unaffected by the Bank of England rate rise.

However, for those other types of mortgages - or whose fixed-rate period is coming to an end - they are likely to face higher payments.

Is there any cheer to be had from the rate rise?

Savers will be looking forward to earning higher interest rates on their nest-eggs.

When interest rates rise lenders tend to get twitchy about the prospects of their borrowers being able to repay their debts

In recent years savers and pensioners buying an annuity - an income for life - have had to make do with low rates of return.

In fact it has been a very gloomy couple of years for savers, with world stock markets tumbling and returns on deposit accounts slashed as interest rates have fallen.

The boot could now be on the other foot and although savers will not be popping the champagne corks just yet they can expect better returns for their thrift.

I have heard there are more rate rises in the pipeline. If so, how much financial pain is in store for me?

No one can say for certain that there are further rate rises on the way.

However, many in the City and some leading economists have factored in the Bank of England's base rate rising by at least another quarter percentage point before the year is out.

According to the Halifax, if that happened a further 15 would be added to the monthly payment on a 100,000 variable rate repayment mortgage - quite a substantial hit.

I have several credit cards - all near their spending limit. Will the rate rise hit me hard?

Credit card rates are less sensitive to Bank of England base rate movements than mortgages.

The quarter of a percentage point rise may not feed through to credit card borrowers at all, particularly as the market place is increasingly competitive.

However, as interest rates rise lenders tend to get twitchy about whether borrowers can afford to repay debts in the future.

In the early 1990s the banks were accused of making an economic recession and a house price crash far worse by pulling the rug from under borrowers.

Many people found their credit card debt was called in at short notice and, as a result, got into financial hot water.

I have recently taken out a loan secured against my property, so am I going to regret it?

Many homeowners - seeing the value of their property rocket in recent years- have been tempted to remortgage to capitalise on rising house prices.

Perhaps the time has come for consumers to ease up on the spend now, pay later culture
However, this type of borrowing comes with a major health warning.

Worryingly, any interest rate rise will hit some homeowners, who have remortgaged, with a double whammy - first on their main mortgage, then again on the second one.

If property prices fall - which some economists are predicting - then people who have borrowed against their homes could soon find themselves in negative equity.

But what really worries economists is the knock-on effect of rate rises.

What knock-on effects?

As a rule of thumb, the Bank of England raises interest rates to slow economic growth and keep a lid on inflation.

But if rates are raised too high, then businesses and consumers will invariably stop spending as they struggle to meet higher debt repayments.

In the worst case scenario, the Bank of England raises rates too quickly during the coming year, forcing the economy into reverse and leading to the loss of jobs.

If the economy shrinks for two consecutive quarters then the dreaded "recession" word comes into play.

What can I do to protect myself?

Firstly, don't panic. No major UK economists are predicting a recession round the corner.

In addition, even with the quarter point rise, interest rates are roughly half their average over the past 20 years.

But some debt experts hope that the interest rate rise will act as a wake-up call to UK borrowers to get their finances under control.

"It would be a sensible step for many people with loans and credit cards to start paying them off rather than building up new debt, while rates are still relatively low," Malcolm Hurlston, chairman of the debt charity the Consumer Credit Counselling Service, told BBC News Online.

The experts aren't saying that people should stop spending altogether, but perhaps the time has come for consumers to ease up on the "spend now, pay later" culture.

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