Scots home owners face rate rise

By Sandy Murray
BBC Scotland business staff

The cost of borrowing will rise gradually over coming months

The cost of borrowing is to go up in the UK.

The Bank of England's Monetary Policy Committee has announced that rates are to increase by a quarter of a per cent to 3.75%.

This is the first time interest rates have risen since February 2000 and the impact of the increase will be more psychological than practical.

A typical mortgage-payer is likely to see payments up by about £15 a month.

Most analysts, though, believe this could be a turning-point in the interest rates cycle.

YOUR REACTION

Views from the street on the rate rise

In pictures

Barring unforeseen events, the cost of borrowing will rise gradually over the coming year.

Such a trend is likely to promote a more cautious approach to borrowing and take some pressure off the housing market.

The average property in the UK has been rising in value at a rate well ahead of average earnings.

In Scotland, the average price in the second quarter of this year was £90,678 and has been rising at a rate of 15.02% per annum. This level of increase will not continue forever.

HOW WILL IT AFFECT YOU?

The payment on a £100,000 mortgage will rise by £14 a month. Find out more

At-a-glance

For the health of the economy, the Bank of England will hope that house price rises ease gently, often referred to as a "soft landing".

The alternative - with sharp falls in house values and negative equity - could kill economic recovery stone dead.

'Considerable risks'

Derek Henderson, a senior partner with Deloitte in Aberdeen, said the bank's Monetary Policy Committee had to strike a balance.

"This rise reflects the Monetary Policy Committee's concerns about inflation arising from house price increases, recent economic growth statistics and debt levels," he said.

But he believes there are considerable risks involved in making the move just as the economy begins to improve.

"The Bank of England should be under no illusions about the continued fragility of economic conditions.

The housing market remains strong

"A rate increase at this stage runs the risk that recovery is choked off."

Scotland, though, may be less sensitive to interest rate changes than the rest of the UK.

Houses here are cheaper and the average mortgage debt is lower.

Beyond a few property hot-spots, such as central Edinburgh, most mortgage payers will be able to absorb increases in their monthly payments.

This also means that negative equity, where the value of a property falls below the level of the outstanding mortgage debt, is a more distant danger in Scotland.

But for all consumers in the UK, the years of ultra-cheap borrowing appear to be over.