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Last Updated: Thursday, 11 January 2007, 14:23 GMT
Q&A: Interest rate rises and you
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The interest rate rise is mixed news for consumers

UK interest rates have risen three times in the past five months as the Bank of England looks to rein in inflation.

With rates now at 5.25%, many home owners will be facing higher mortgage repayments, while credit card debts will also cost more.

Savers, however, should be looking forward to better returns.

How will mortgages be affected?

Each increase in interest rates has been a relatively small quarter of a percentage point.

But the cumulative effect has been to put rates up by 0.75 percentage points, and it means that people with borrowings, especially mortgages, are now going to start noticing the effects.

The Halifax bank calculates that someone with a 100,000 mortgage has to pay around 16 for each quarter of a percentage point increase.

So someone whose mortgage is on a variable rate, or whose fixed-rate deal will soon expire, is about to find themselves paying their lender 50 or so more each month than they were last summer.

"Anyone borrowing on a variable-rate basis should factor in an expectation that rates have further to rise," warned the Council of Mortgage Lenders.

Will savers benefit?

Savings rates will rise too, but probably not quite as quickly.

Banks and other lenders tend to wait a while before passing on the benefit of higher interest rates to their customers.

And as research by BBC News and the financial information group Moneyfacts showed recently, many lenders have not been passing on the benefits in full either.

"People who have left their savings in a low-paying branch-based account may find they are being left behind," said Andrew Hagger of Moneyfacts.

But higher savings rates, to a greater or smaller extent, are inevitable within the next month or so.

"This is a bit of a shock - but I don't expect many decisions until this time next week," said Mr Hagger.

How will the housing market be affected?

The property market in the UK has gone through an unprecedented boom in house prices.

On average, house prices have doubled since the middle of 2001 and recently growth has once more accelerated into double figures.

Will they now start to slow down?

They should do if the higher cost of repaying a mortgage puts off many buyers.

"It is quite likely that housing demand will start to fall back," said Milan Khatri, the RICS chief economist.

"Affordability conditions for first-time buyers will continue to worsen due to higher mortgage interest rates and this will continue as further interest rate rises are likely in 2007."

If that happens the market may turn downwards, analysts said.

A big factor in the relentless rise of house prices has been speculation - the belief that prices will continue rising, no matter what.

Should that view change, and fears spread that the market is about to slow and prices might drop, then potential buyers may hold back and the predictions of a slowdown could become a self-fulfilling prophecy, analysts said.

Will more people be driven into insolvency?

The Royal Institution of Chartered Surveyors (RICS) warned that any further rate rises might lead to more people failing to make their mortgage repayments and having their homes repossessed.

Repossession orders granted by the courts, and actual repossessions, rose sharply last year, though they are still at historically very low levels.

But it is inevitable that for those whose finances are most on edge, the Bank of England's latest decision may prove to be the proverbial last straw.

Mortgage defaults and repossessions thus seem likely to continue going up in 2007, analysts said.

According to debt advisory agencies, borrowing built up by reckless credit card spending has been the most dangerous form of debt to accumulate.

It has been this sort of debt, rather than steadier and cheaper mortgage borrowing, which has driven many people into insolvency in the past few years.

Credit card debts have proven easy to rack up, despite the fact that credit cards charge much more interest than secured forms of borrowing.

As the credit card bills for Christmas land on our doormats this month, the even higher costs due to the Bank of England's latest decision may prove too much for some people.


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