Tighten seatbelts and put your house in order

FAMILIES are facing the double whammy of sharply rising prices, and the threat of an interest rate hike. The Consumer Prices Index rose by 3.7 per cent in December, nearly 2 per cent higher than the target, following soaring food, utility and fuel prices. The Retail Prices Index, based on a wider basket of goods, including housing, also climbed to 4.8 per cent.

Consumers are already being badly hit by the rising cost of living. Motor insurance has soared by nearly 40 per cent, and petrol prices jumped 6.13p per litre to a new record average of 128.77p. Diesel has also gone up by 18.98p compared with a year ago.

Utility bills have risen, while freak global weather, not least in Australia and Brazil, has hit food supplies. Excessive rain in Russia, Canada and Pakistan curbed harvests. Drought in the US has seen a 10 per cent drop in the corn crop.

But there could yet be worse to come. Recalcitrant inflation will increase pressure on the Bank of England to raise interest rates, pushing up costs for homebuyers at a time when the housing market is already on its knees.

There has been no respite in the plunge in demand for mortgages. On Friday, the Council of Mortgage Lenders revealed that last year lending fell 5 per cent compared with the previous year. In December gross borrowing dropped by 6 per cent from 11.7 billion in November. This was 18 weaker than December 2009.

CML economist Peter Charles warns that higher rates could see the market weakening further. He says: "Money market rates have recently moved higher in anticipation of a rise in base rate and some lenders have recently reflected these increases in their product pricing. Against this backdrop, consumer demand may be weaker than we would otherwise have expected."

We look at ways to help those facing the biggest price hikes - mortgage-holders and motorists - fight the squeeze.

Mortgage-holders

Even without the current inflation trend, the kind of unrealistically low interest rates were always going to have to return to more normal levels at some stage. By the summer that tipping point may well have been reached.

Borrowers should consider fixing rates as soon as possible, as the best deals have started to disappear. Northern Rock, Halifax, Clydesdale and Skipton are among the lenders who have withdrawn their cheapest loans. Others will follow.

Mortgage broker Carol Begbie at Female Independent argues: "We normally recommend fixed rates anyway, particularly to first time buyers or those with stretched budgets.

"The difficulty now is that while there are plenty of two-year fixes around, you have to pay significantly more for a longer fix, which may give better value over the longer term. Similarly, there are plenty of deals for borrowers looking to borrow 85 per cent or less, but above that you will have to pay significantly more."

For example, the Post Office will lend to borrowers with only a 10 per cent deposit at 5.99 per cent fixed for five years, while Yorkshire Building Society will charge 3.99 per cent for five years with a 40 per cent deposit, although its 1,495 fee is higher than the Post Office's 995 fee (for more fixed deals see Moneyfacts best buy table on the opposite page).

If you are thinking of remortgaging, do not panic switch. It is possible base rates may only be 1 or 1.5 per cent higher at the end of the year than they are now. Always include all the switching costs. Where you have been enjoying reduced mortgage repayments, use this spare cash to reduce your loan, and therefore shelter you from future rate rises.

The Co-op Bank last week increased to half the amount you can pay off your mortgage without penalty. Others have also increase the limits on penalty-free repayments.

Motorists

Moving to a smaller car is one obvious way to improve fuel efficiency, but this in itself can incur costs and may not be appropriate for your needs.

However, by changing the way you use your current car you can reduce fuel bills. The AA recently conducted a trial in which staff used several fuel-efficient tips while driving. One driver reduced his petrol bill by 33 per cent, while a few saved 30 per cent on fuel costs. The typical saving was between 10 and 20 per cent. An AA spokesman said: "It really is possible to make a substantial reduction to your fuel bill just by changing your driving habits."

1. Find out what the optimum speed for fuel efficiency for your car is and stick to it where practical. For many vehicles this will be around 55 miles per hour.

2. Stay in a higher gear where possible. The lower the rev counter the better the fuel consumption.

3. Turn off the air conditioning, and use the electrics sparingly. Avoid the heated seat and blower, and turn off heated windscreens once they have done their job.

4. Drive smoothly. Avoid sudden acceleration or braking. If you see traffic has stopped ahead, begin easing off the accelerator a bit earlier so there is no need to hit the brakes.

5. Empty the boot and get rid of any excess weight. Shedding weight can help shave pounds off petrol bills.

6. Half fill your petrol tank, if you live in town and garages are abundant. Petrol is very heavy and many cars now have large tanks. Get into the habit of only half filling up.

7. Check your tyre pressure once a week, as under or over-inflated tyres cause problems.

8. Use internet price comparison websites to always buy from the cheapest garage locally and make the most of any money-off vouchers on supermarket petrol.

9. Cut out short journeys. Walk or cycle instead.

10. Consider downsizing. If you switch from a larger car costing, say, 20,000 to 30,000, that costs 75.69 pence per mile, to an average family model costing 12,000 to 16,000 new, you would save around 23 pence per mile, assuming 52.59 pence per mile for an average car. Downsizing further to a new model costing up to 12,000, the running cost could drop to 42.36 pence per mile - a saving of 33 pence per mile.