Rate rise brings bad news for borrowers

Rate rise brings bad news for borrowers

Today's 0.25% rise in the base rate spells trouble for borrowers who, unless they are on a fixed-rate deal, will almost certainly see the cost of servicing their debts grow.

While very few lenders are likely to announce their intentions straight away, most are likely to pass on at least some of the rate rise.

Borrowers who were on discount deals pegged to their lenders standard variable rate (SVR), or paying the SVR itself, all saw an increase in their repayments in September following August's quarter point increase, and it seems likely higher mortgage bills are on the way.

For a borrower currently paying 4.75% on a repayment mortgage of £120,000, the average debt according to the Council of Mortgage Lenders (CML), a 0.25% rise will mean their repayments climb by £20 a month.

Those who have borrowed more will need to dig deeper into their reserves.

Financial information provider Moneyfacts has calculated that a borrower with a £200,000 mortgage arranged on a repayment basis will pay £28.95 more a month when the rate they pay rises from 4.75% to 5%.

If the same mortgage was arranged on an interest-only basis, their monthly outlay would rise by £41.66. Over a year they will pay just under £500 more for their mortgage.

According to Moneyfacts, following the August base rate rise the 126 lenders on its books all increased their SVRs.

While 71% passed on the 0.25% increase, 23% raised.....continued below

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their rates by more - some up to 0.35% - and the remaining 6% passed on small rises.

Most increased rates for existing borrowers with effect from September 1.

Whether they all opt to pass on the full 0.25% rise remains to be seen. Ray Boulger, senior technical specialist at mortgage broker John Charcol, says some may think twice about raising their rates if it means taking them above 7%.

Many of the biggest players, including Halifax, Abbey and Cheltenham & Gloucester currently have SVRs of 6.75% and passing on the full 0.25%, as they all did last time, would take them to the 7% threshold.

This could be important as, according to Lisa Taylor, a spokeswoman for Moneyfacts, Halifax's position as the country's biggest mortgage lender mean many of its competitors wait to see what it does before making an announcement.

The lender said today it would be making an announcement on its response to the rate change "in due course", but if Halifax opts for a smaller rise, borrowers with other lenders could benefit.

Trackers and fixed rates

Those on tracker deals have already had their fate decided. These deals are tied to the base rate and any changes are guaranteed to be passed on.

How quickly is outlined in the small print of the deal, and while some borrowers will have the increase factored in to their next daily interest calculation, others may get a stay of execution.

Following the last rate rise, Cheltenham & Gloucester and Nationwide tracker customers continued to pay the old rate until September 1, while HSBC customers felt the effects of the rate rise straight away.

Nonetheless, the financial comparison website MoneyExpert.com maintained today that tracker mortgages still offered good value.