Hopes of house price rises dampened: Fixed-rate mortgages are creeping up, writes Caroline Merrell

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The Independent Online
HOMEOWNERS hoping that low fixed-rate mortgages would help spark off a house price revival had their hopes dampened this week as most of the big lenders increased rates by as much as 0.5 per cent.

The upward movement in fixed interest rates coincides with the publication of a survey on house prices from Morgan Grenfell, which predicts that house price inflation this year will be only 3 per cent, and next year 4 per cent.

In January, the UK's two biggest building societies, Nationwide and the Halifax, predicted that house prices would rise by as much as 5 per cent.

Morgan Grenfell has downgraded the forecast because of the increase in fixed-rate mortgages since the beginning of the year.

According to the report, at the end of last year about 60 per cent of new mortgages were fixed.

The report said: 'The latest offers put the cost of a five-year mortgage at around one percentage point above the floating rate mortgage. In effect, therefore, there has been a rise in mortgage rates since the start of the year, despite the 0.25 per cent cut in interest rates.

Morgan Grenfell also predicted that tax increases this year, estimated to cost about pounds 16bn, mean that real income growth is not likely over the next two years, which is likely to act as a significant drag on the market.

It says that in some months over the next year house prices could fall as the tax increases begin to take effect. The cutting of mortgage interest tax relief from 25 to 20 per cent will cost households up to pounds 110 a year, and Morgan Grenfell predicts that if government proposals to abolish it altogether by 1998 are followed through the extra costs on a 25-year mortgage will be pounds 7,250.

The movement in rates means that nearly all the longer-term fixed rates available are now above the variable rates.

Abbey National is now offering rates of between 6.49 per cent and 8.4 per cent depending on the terms of the mortgage.

National Westminster Bank is offering fixes of between 8.79 per cent and 9.19 per cent, while Lloyds has fixes of 6.99 per cent to 9.5 per cent.

Nationwide is offering a series of new fixed rates, ranging from 6.69 per cent for two years to 8.99 over seven years, for borrowers with at least a 15 per cent deposit.

----------------------------------------------------------------- BEST FIXED RATES ----------------------------------------------------------------- Lender Rate (apr) Until % % Bank of Ireland 3.75 (3.9) 1/3/95 Northern Rock 4.99 (5.2) 1/1/96 Bristol & West 7.4 (7.0) 4 year Woolwich 7.99 (8.4) 5 year Royal Bank of Scot 8.5 (8.9) 2/3/04 Britannia BS 3.99 (7.3) 1/5/95 Birm'ham Midshires 5.75 (5.9) 1/4/96 Bristol & West 6.65 (6.9) 3 year Abbey National 7.55 (7.9) 30/6/98 NatWest 8.79 (9.2) 31/3/04 ----------------------------------------------------------------- Source: John Charcol 071-611 7000 -----------------------------------------------------------------

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