John Charcol: MPC forges on with rate hike to 5.75%

Fears over inflation outweigh fears over pushing consumers over the brink

Borrowers beginning to turn away from security of fixed rates.

Market Comment "Most economists anticipated today's rate rise, following concerns that the Consumer Price Index would not fall back to the target 2% without another hike".

"Last month's MPC knife edge vote of 5-4, with The Governor himself clearly wanting to make a point by voting, against the majority of his committee, for a rise, also made it more probable", says Ray Boulger of leading independent mortgage adviser, John Charcol.

"However, it would have perhaps been more logical to wait at least for the next quarterly inflation report in August, as much of the impact of the previous rise in Bank Rate to 5.5% only 2 months ago is still to become obvious".

"May's mortgage lending figures showed an ongoing slowdown - even before the effect of May's Bank Rate rise comes through - and the pain from a full 1 per cent rise over the last 10 months is still to impact on most borrowers with a fixed rate mortgage".

"Even without the further quarter point rise today there would in any case be a considerable negative impact on the housing market over the next couple of years, as the 40% of borrowers, i.e".

"4.5m households, with a 2 year fixed rate progressively have to refinance at higher rates." What should borrowers do now Ray? "With the market having fully factored in not only this rise, but also another one to 6%, SWAP rates are now at their highest since 2000 and most fixed rates look expensive compared to discounts and trackers, unless Bank Rate goes beyond 6%".

"While fixed rates have always been popular due to the security they provide, we are now seeing a fall in the proportion of borrowers choosing a fixed rate as borrowers decide that rates are close to their peak, thus reducing the value of paying a premium rate for interest rate protection".

"Currently, the best two year tracker mortgages are around 0.35% cheaper than the best 2 year fixed rates, even after the effect of today's rise".

"Thus a fixed rate mortgage will only be cheaper if Bank Rate rises rapidly to at least 6.25% and stays there, or goes higher, for some time".

""For example, for remortgages Halifax offers a two year tracker mortgage, with a fee of ?1,499, but with a free valuation and free legals, at 0.51% below Bank Rate, giving a new pay rate of 5.24%.

BM Solutions offers a 2 year tracker mortgage at Bank Rate - 0.81% with a fee of 1.25%.

Despite the high fee the net rate after factoring in the fee is still as low as Bank Rate - 0.18%".

""One solution for borrowers who like fixed rates but don't want to lock in at today's rates is to take a tracker mortgage with no early repayment charge and / or a drop-lock option, which allows them to play the waiting game and switch to a fixed rate when they think the time is right".

"For most borrowers good independent advice will be critical to getting good value from their mortgage in the current environment." Borrowers should contact John Charcol on 0800 71 81 91 for advice.

Two years ago, the best two year fixed rates were priced at around 4.5% - most are currently over 1% higher than that, i.e over 5.5%.

Anyone who took a 4.5% fixed rate and refinances on to a new fixed rate now at 5.5% will pay £116 extra each month for a £200,000 repayment mortgage.

This is represented by the blue boxes below.

However, not remortgaging in time and moving to a lender's standard variable rate means the payment shock will be far greater.

For a £200,000 mortgage the increase will be some £400 per month from a 4.5% fix to an SVR of 7.75%.

Even on a smaller mortgage of £100,000, the same calculation shows monthly payments will increase by £200.

These are increases of 36%, but for anyone with an interest only mortgage the increase would be over 70%!.

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