Having enjoyed the cheapest borrowing for 48 years, the UK's 11 million homeowners must wake up and smell the coffee. The Bank of England's decision to raise base rate by a quarter per cent represents a metaphorical red card for UK's property boom.The increase is the first since February 2000 and comes as a blow to many mortgage holders who have been banking on smaller monthly bills following a consumer spending boom. Borrowers with an average £100,000 variable repayment mortgage will see monthly payments increase by around £20 as a result of the rise (visit Yahoo's mortgage centre to compare 1000s of mortgages). This rise alone is unlikely to break the bank for most but is it a sign of things to come? Jeff Knight of lender GMAC-RFC says: 'We must not forget that it was only a couple of years ago that interest rates dropped below the 5% figure. We are still in a very low interest rate environment, despite this rise so there is no need for any knee-jerk reaction to this increase.'
The Bank's influential Monetary Policy Committee said that although the global economic recovery appears to be gathering momentum, the pattern is uneven, with neither household spending nor the housing market slowing as much as it had expected. It blamed 'underlying inflationary pressures' for the 'modest increase'.
Some City economists are predicting a base rate closer to five per cent by the second half of 2004, which will mean a typical mortgage interest rate of around seven per cent. 'The years of people being able to borrow money for nothing are coming to an end. By spring 2004 I expect house prices to start falling, ultimately by around 20 per cent from the peak of 2002,' said Roger Bootle of Capital Economics.
Ray Boulger of Charcol remains unconvinced: 'Today's decision was widely anticipated. However, where we go from here may not be as clear cut as the City is predicting.' Boulger continues: 'The City's view is that the base rate will rise to 5.25% by the end of 2004 but this could well turn out to be on the high side. There are plenty of arguments against a further 1.5% rise in the next 12 months.'
Click here for independent personalised mortgage advice
Rumours of future rate hikes may be exaggerated but they come at a time when many people have withdrawn equity from their homes to increase their standard of living. They will also dampen High Street spending in the run-up to Christmas, no doubt by design, because it is not just mortgage lenders which will act on the base rate rise - credit and store card issuers could hike their already huge interest rates, piling the pressure onto the millions of indebted Britons. If you have signed up a to a seductive introductory rate, make sure you switch again before you default to the issuer's standard rate.
So should homeowners batten down the hatches for an economic squall? 'Given the uncertainty, mortgage borrowers should take a cautious approach and ensure they have enough flexibility to cope with further rate rises if they occur,' advises Council of Mortgage Lenders' Director General Michael Coogan.
'Our advice is that those who can should plump for a flexible discount/tracker mortgage and over-pay now while rates are still historically low in order to pay off more of their mortgage debt,' Boulger explains. 'However, there will always be people who want the security of fixed monthly payments. First time buyers and anyone on a tight budget should still consider fixed loans and anyone who can't afford their mortgage at a rate of at least 5% probably shouldn't buy the property.' he adds.
The message is clear. Now is a good time to review your finances and ensure you are getting the best possible deal from your lender.
And don't forget that rate rises have a silver lining for savers. Nationwide Building Society was the first to announce an increase to all of its variable rate savings and banking rates by at least 0.25%. In particular, its Instant Access Cash ISA and eSavings will rise by 0.50%, with effect from 1 December 2003. Let's hope that others follow suit as quickly as possible.
Having enjoyed the cheapest borrowing for 48 years, the UK's 11 million homeowners must wake up and smell the coffee. The Bank of England's decision to raise base rate by a quarter per cent represents a metaphorical red card for UK's property boom.