Homeowner misery as interest rates rise

Published on Thursday 9 November 2006 14:22

HOMEOWNERS were today hit with more costly mortgages after the Bank of England raised interest rates to their highest level for more than five years.

The Bank's Monetary Policy Committee increased rates by 0.25 per cent to five per cent - despite the Bank's governor, Mervyn King, insisting last week a rise was "not a done deal".

Today's rise will mean the average home owner with a 100,000 base-rate tracker mortgage will now have to fork out around 16 a month more in payments than before - more than 190 extra a year.

Borrowers with personal loans will also suffer from the rise, as their repayments will almost certainly increase. And businesses will also be squeezed as the cost of their financing jumps too.

The quarter per cent hike is the second in the past six months - following an increase to 4.75 per cent in August. Two of the MPC's newest members - Tim Besley and Andrew Sentance - voted for a rise in October, while the others opted to hold rates.

Craig Esplin, of Robert Craig Financial Advisers on Comiston Road, said the rise could mean a financial headache for borrowers who are already close to their comfortable limit. He said a typical 100,000 mortgage on a rate of 6.75 per cent and with interest calculated on a daily basis, would rise from around 690.91 to 706.78 a month.

He said: "It all adds up. We had a quarter of a per cent rise a few months ago and now we have another one. That means an average mortgage holder will have not just a 16 rise today - but had a similar increase in August. That leaves them with quite an extra bill for the year.

"If people are near to their limit of affordability, they might find this rise a struggle. If people have personal loans too, it could end up making quite a difference."

But savers will be rejoicing as the rise means more interest for them on money stashed in bank or building society accounts.

David Lonsdale, assistant director at CBI Scotland, said: "It will increase the cost in borrowing and will particularly affect those firms looking to invest. It will also affect exchange rates and therefore be an issue for Scotland's exporters, especially manufacturing firms who will find it more expensive to export."

The hike did not come as a surprise as almost all analysts were expecting the MPC to announce an increase in a bid to control inflation and soaring consumer debt.

And there could be further pain ahead, with the likes of the National Institute of Economic and Social Research predicting one, or possibly two, more rises in the pipeline next year.