Beating the Bank; with Interest Rates Predicted to Jump Again, Sara McConnell Says Check out the Discount Market to Help Keep Your Monthly Payments under Control

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MORTGAGE borrowers heaved a collective sigh of relief this month when the Bank of England's Monetary Policy committee decided not to raise interest rates. But many homeowners on variable-rate loans, including discount and tracker deals, are already feeling the pain of bigger monthly mortgage bills.

Five successive rises since last November have pushed the bank base rate up to 4.75 per cent from 3.5 per cent this time last year, adding around [pounds sterling]100 a month to the average [pounds sterling]100,000 interest-only mortgage.

Even those on fixed rates are not immune.

Many people who took advantage of cheap, two-year fixed-rate deals in the summer of 2002 are set to get a nasty shock when the deal ends and they go back onto their lender's standard variable rate (SVR).

Northern Rock borrowers on the bank's twoyear fix have been paying 3.99 per cent for the past two years. When the deal ends at the end of this year, they will revert to the bank's SVR, currently 6.74 per cent. This will add [pounds sterling]2,750 a year to a [pounds sterling]100,000 loan, says Duncan Pownall, senior consultant at Towry Law Mortgages.

If rates rise further, as they are widely expected to, heavily committed borrowers could start to struggle to repay their loans, warns independent analyst Mintel. Research published by the analyst at the beginning of September reveals that a quarter of borrowers - some 4.3 million people - would have a problem paying their bills if rates rose by a further two per cent.

A third of younger buyers aged between 25 and 34 admit that they would struggle. An estimated 640,000 borrowers, including many Londoners, have stretched themselves so far in order to get on the property ladder that a two per cent rate rise could be catastrophic to their finances.

"It is not surprising that borrowers will struggle with their repayments given further rises in interest rates," says Paul Davies, senior finance analyst at Mintel and author of the research. Davies admits that a rise of as much as two per cent is unlikely, but says: "I picked quite a big figure to shock people into responding."

City experts are predicting at least one more quarter percentage point base-rate rise this year, with another in the New Year, before rates fall back to current levels next summer. So how can you limit the pain of big bills and avoid struggling with repayments?

Be proactive If you are nearing the end of a fixed-rate or discount deal, negotiate another, either with your existing lender or a new one. Do not expect your lender to automatically offer you another deal.

Many will put you back on their SVR, almost certainly the most expensive way of paying your mortgage, especially when base rates are rising.

"Being on a standard variable rate is madness," says David Hollingworth, of London & Country Mortgages. Why pay an SVR of 6.75 per cent when you can fix your rate for two years at less than five per cent, or get a discount of two per cent or more off the SVR? …


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