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Your Money > Personal Finance Articles > Beat the rate...
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By Naomi Caine The surprise quarter point lift in interest rates to 4.75% last week could put the squeeze on household finances. The increase was the first move since August last year and the first rise for nearly two years. And it comes on top of recent hikes in energy Switch to cut mortgage costs If you have a tracker mortgage your rate automatically rises in line with the base rate, so it will go up by the full quarter point. Borrowers who pay the standard variable rate (SVR), or a discounted rate that is linked to the SVR, must await a decision from their lender. The typical SVR is 6.5%, but most banks and building societies are expected to raise their SVRs to 6.75%. Some might even squeeze a bit more out of their borrowers. James Cotton at L&C Mortgages, a broker, says: "I think quite a few lenders will put up their SVRs by more than a quarter point as they try to reduce pressure on their margins." If the rise is passed on in full, it will add about £15 to the monthly payments of a borrower with a £100,000 repayment mortgage - or £20 in the case of someone with a £100,000 interest-only home loan. New customers will pay the higher rates immediately, but rates for existing borrowers will not typically change until next month. Some lenders, including the Co-operative Bank and several smaller building societies, have already increased their SVRs in the past few months, before the announcement by the Bank of England. So their customers could be hit with a double whammy. People with fixed-rate home loans - thought to account for about half of all mortgages - will be protected from any rate rise. If you are paying the SVR, you should almost certainly switch to a cheaper deal. You might also consider switching if you pay a discounted rate and are not tied into the loan. "Any movement in the base rate provides a good incentive to think about switching lenders," says Cotton. "A lot of people will still be paying their lender's standard variable rate and they should certainly start thinking about changing their mortgage." You can find details of best-buy mortgages in the national press or at comparison websites, such as www.yahoo.co.uk or moneyfacts.co.uk. You might also visit a mortgage broker. You will normally have to pay fees to switch, including valuation and legal fees, but it can often still make financial sense. Check though that you will not have to pay a penalty to redeem your existing loan early. Someone with a £100,000 repayment mortgage over 25 years would pay £691 a month at an SVR of 6.75%. If they switched to a two-year deal from Skipton building society fixed at 4.75%, they would pay £570 a month. There is a £499 arrangement fee, but free valuation and legal work. The cheap fixes might not be around for long. Lenders fund their fixed rates from the money markets, where two-year rates had shot up from 5.05% at the beginning of last week to 5.27% by the end. The increase suggests the City expects another rise in the base rate sometime soon. In fact, many economists are predicting a base rate of 5% by the end of the year. There are some fears that the hike in mortgage rates could lead to an upturn in repossessions, which have hit their highest level since 2001. But Michael Coogan, director-general of the Council of Mortgage Lenders, plays down any fears of a surge in defaults. He says: "The rise will add to payment difficulties for hard-pressed mortgage borrowers at the margins. But we continue to expect repossessions to run at levels of around 15,000 a year between 2006 and 2008, well below their long-term trend." Click here to compare mortgage rates Boost the returns on savings There are seven savers for every borrower and the quarter-point rise in the base rate should boost returns for the silent majority. National Savings & Investments was the first to announce an immediate increase in savings rates. Its Direct Isa is now paying 5.3%, up from 5.05%. But savers should be on their guard. Banks tend not to pass on the full increase so they can bump up their own profits. Interest rates rose five times between November 2003 and August 2004, from 3.5% to 4.75%. But savers lost out on an estimated £300m each time because of rate manipulation, according to research by AWD Chase de Vere, an independent financial adviser. Sue Hannums of AWD Chase de Vere says: "In some cases it will be a lose-lose situation because consumers will see their mortgage payments rise but they won't get the benefit from the increase in the savings rate." A number of banks have also cut their savings rates recently, even though the base rate had been on hold for a year. Even if they put up rates this time round, it might not compensate savers in full. You have to keep a regular check on your savings rates. Again, you can use online comparison services. Switch if you think you can earn a better return - but watch out for penalties, particularly if you have money in a fixed-rate account. Click here to compare savings rates Pay off your debts You might want to think about using some of your savings to pay off your debts, or at least cut the amount you owe. We are more than £1 trillion in the red, partly because borrowing is so easy - and so cheap. And it's still pretty cheap, despite the rate rise. Some campaigners blame banks and building societies for our growing debt mountain. Vince Cable, the Liberal Democrat Treasury spokesman, says: "There is currently a considerable degree of irresponsible lending and aggressive marketing to individuals of personal loans and credit. Lenders have an obligation to stop these practices and provide greater levels of debt advice." The situation certainly seems to be getting serious. A record 26,000 people became insolvent in England and Wales during the second quarter of the year, according to figures from the Department of Trade and Industry, a 66% rise on the same period in 2005. The banks might be partly to blame, but they also have to bear some of the cost. Barclays is the latest bank to issue a warning that its customers are struggling to pay their bills. The amount of money it has set aside to cover bad debts rose by 50% to top £1 billion in the first half of the year. HSBC, Lloyds TSB, Alliance & Leicester and HBOS have already announced big increases in bad debt provision. If you have savings and debts, it makes more sense to clear the debts, primarily because you don't pay tax on your borrowings. Let's assume you are paying a mortgage rate of 5%. You would need to earn a gross rate of 8.3% on your savings as a higher-rate taxpayer or 6.25% as a basic-rate taxpayer to be better off saving than paying off your debt. If your debts are primarily on credit cards that charge higher rates, the logic is even more compelling. Click here to compare credit card rates |
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