Mortgage rates are edging up, not going through the roof

Just when British homeowners had settled into a comfortable pattern of rising house prices and consistently low mortgage rates, along comes a quarter percentage point hike in the base rate and horror stories of property repossessions and record bankruptcy levels.

Some 8,140 properties were repossessed in the first half of 2006, compared with just 4,620 for the same period last year - up 76 per cent - the Council of Mortgage Lenders (CML) said.

The Government's Insolvency Service revealed that a record 26,021 people in England and Wales went bankrupt or took out an IVA (Individual Voluntary Arrangement) during the second quarter of 2006. The debt management service One Advice has said it expects the total figure to reach 100,000 this year, and the base rate rise is likely to make matters worse.

Several lenders have already raised their standard variable rates (SVRs) in line with the base rate. Halifax and Cheltenham & Gloucester are both now at 6.75 per cent, Direct Line at 6.38 per cent and First Active at 5.85 per cent. Northern Rock's SVR will rise by 0.25 percentage points to 6.84 per cent from 1 September.

But the lenders to watch out for are those that raise rates by more than this. Last week, the One account put up its highest SVR - applicable to mortgages of over 95 per cent loan-to-value - by 0.35 points to 6.7 per cent.

So should homeowners be genuinely worried - or has the rate rise simply placed some borrowers outside their psychological comfort zone?

"We are by no means in crisis," says Nick Gardner of broker Chase de Vere Mortgage Management. "Put into a historical context, interest rates are still very low. In the 1980s, rates averaged 10 per cent, and in the 1990s just over 9 per cent.

"Yet for the majority of the past five years we've enjoyed sub-5 per cent rates."

House prices also appear buoyant. Nationwide building society revised its estimates of annual growth up from 3 to 5 per cent last week.

It's worth underlining, too, that the rate rise has an immediate impact only on those with mortgages linked to a variable rate, such as "tracker" deals. An estimated 70 per cent of all new mortgages taken out in the first six months of this year were on a fixed rate, according to the CML. For these homeowners, the rate rise won't appear on the radar.

Borrowers who are stretched to the limit with large mortgages on a variable rate may feel the pinch, but even for this group, the rate rise is unlikely to break the bank. As Mr Gardner says: "The hike translates into an extra £21 a month on a repayment mortgage of £150,000 if the mortgage rate rises from 4.79 per cent to 4.99 per cent."

Buyers and remortgagers uncertain whether to choose a fixed or tracker deal should base their decision on personal circumstances. As a rule, those on a tight budget should opt for a fix. But Ray Boulger of broker John Charcol says most borrowers would still be better off with a variable-rate tracker mortgage: "The base rate would have to rise beyond the 5 per cent mark to make fixed rate mortgages look attractive in comparison."

For example, Portman building society has a two-year fix priced at 4.99 per cent (with no legal or valuation fees for remortgagers) plus an arrangement fee of £649. But, even with the recent rate increase, a two-year discounted tracker from Alliance & Leicester with interest payable at base rate minus 0.16 per cent would leave you on a rate of only 4.59 per cent.

Ian Coe, 40, from Sheffield, is happy - for now - with his tracker home loan. He renewed his two-year base-rate tracker with Skipton building society a couple of months ago, even though he expected to see a rise in interest rates.

"I am still paying only 4.99 per cent, even with the recent rise," he says. "I expect rates to go up another 0.25 per cent by Christmas but will only regret taking a tracker mortgage if the base rate rises to 5.5 per cent."