Fool.co.uk responds to today's rate hike by the Bank of England

David Kuo, Head of Personal Finance at Fool.co.uk, says:

"The Bank of England's decision to raise rates by 0.25% to 5.75% today was not unexpected.

There were even indications that rates could have risen by 0.5% to 6%.

"However, homeowners should not lower their guard.

The Bank of England may raise interest rates once, if not twice, within the next twelve months.

This may see rates rise to 6.25%.

Today's increase effectively means that homeowners with variable-rate mortgages will see repayments for a 25-year, £100,000 loan rise from £614 to £629 a month.

Homeowners on interest-only mortgages will see their payments increase from £458 to £479 a month (1).

"The appreciably lower monthly payments for interest-only mortgages may tempt some homeowners to switch from repayment to interest-only mortgages.

However, interest-only mortgages cost more over the long run because none of the debt is being paid back.

Consequently, we should try to make savings elsewhere in our budgets rather than opt for short-term cures.

"The short-term remedy only works if you have a long-term plan.

Simply switching to an interest-only mortgage without employing a plan to repay the debt is a bit like using oil of cloves to relieve a toothache.

The discomfort may ease briefly, but without proper treatment it will leave you with a throbbing pain that won't go away.".

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