Run for cover as interest rates rise

Increase will force the homeowner to find ways to save, and bring a little cheer back for the saver
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The Independent Online

Joanne and Karl Stocks could have been forgiven a quiet smile when the Bank of England announced an increase in its base rate by 0.25 per cent to 3.75 per cent on Thursday: they have not just one but two fixed-rate mortgages, so they are shielded from rate rises for the next five years.

Joanne and Karl Stocks could have been forgiven a quiet smile when the Bank of England announced an increase in its base rate by 0.25 per cent to 3.75 per cent on Thursday: they have not just one but two fixed-rate mortgages, so they are shielded from rate rises for the next five years.

"We took out a 4.39 per cent fix with Nationwide through our adviser M2 last April," Mrs Stocks said. "But we've just added another mortgage fixed at 5.29 per cent because we want to move from a two-bedroom house to a three-bedroom one. At least with a fix you know how much you have going out, instead of watching the telly and being told rates are going up and you're going to have to pay more for your mortgage."

Mr Stocks is a joiner and Mrs Stocks stays at home in Eckington, near Sheffield, taking care of their daughters, Kelly, aged six, and 20-month-old Georgia. They Do not borrow on their credit card, and have no other loans. But they have an instant access savings account with Halifax, so they will benefit from higher rates.

But millions of people are not as well placed. Despite a rush to sign fixed-rate mortgages in the past six months, more than two thirds of houses are being financed through variable-rate loans. Someone with a £100,000, 25-year repayment mortgage with an interest rate of 5.5 per cent before Thursday will have to find an extra £15.24 a month.

This week's interest rise was the first for nearly four years. Most commentators believe we are in for a succession of rises over the next year or two, so savers, borrowers and investors may have to get used to a different climate in which many long-held assumptions could be turned on their head.

Fixed-rate mortgages suddenly become much more desirable than fixed-rate bonds, rather than the other way round. Businesses are going to be faced with extra layers of costs to finance their debt, which will hold back share prices, so it will pay to buy shares in low-debt companies. And consumers, long cherished as the engine on which economic growth depended, are being told to go easy, not the most alluring instruction with Christmas around the corner.

"The advice is straightforward," Jim Leaviss, head of fixed interest at the M&G unit trust group, said. "People should repay debt, especially on mortgages and credit cards. That will be the single, most profitable, thing to Do. No asset class Does well in a rising interest environment, so it is more important to clear your debts than to think about where to invest."

That is easier said than Done for many, so the next step is the boring chore of going over your finances to make sure you are not missing out on either savings or loans. Trouble is, apart from mortgages, few advisers will help, because there is little or no commission in it. But although many fixed-rate deals have been withdrawn in anticipation of the rise, a good broker should still be able to find you a deal.

Buy-to-let, where people borrow up to 80 per cent of the cost of an investment to buy a house or flat, could face a shake-out. Jonathan Morgan, co-founder of thatsproperty website, said: "Long-term and properly funded, investors should find the higher interest has little impact. We welcome a chance for the market to cool, because it's been going crazy, thanks to people with insufficient funds. Those people need to be shown reality, but for the rest, rents might firm, because some people might find they can't afford to take out a mortgage now."

Although borrowing rates began to jump as soon as the Bank announced its verdict, cynics will be watching to see how quickly savers are allowed to reap the benefit. History suggests some will have to sit on their hands for a while.

Philippa Gee, of the Wolverhampton-based adviser Torquil Clark, said: "I would wait to see what this weekend and next week brings in higher savings rates. I'd be reluctant to go for a fixed rate now unless it's absolutely essential."

The most tantalising question is how stock market investors will fare with higher interest rates. In the immediate aftermath of the rate hike share prices rose, partly in relief that the news was not worse.

The money markets, ultimate source for fixed-rate savings and mortgages, have effectively been predicting a 5 per cent base rate by the end of 2004. Shares have been nervous since the FTSE 100 index peaked at 4368.80 last month, but the real issue is how far and for how long rates are going to rise. The longer the agony continues, the more of a drag it will exert on share prices because of the extra costs being loaded on to industry at a time when consumers will also be being squeezed.

Patrick Connolly, of the adviser Chartwell Investment, said: "A sustained series of rises will be bad for companies, and corporate bond funds will also struggle. Long-term, companies with higher borrowings are going to be more affected, and those that rely on consumer spending."


* Do check the interest rates on your mortgage, credit cards, personal loans and savings. Visit websites such as moneynet, moneyfacts or moneysupermarket to see how your rate compares with the best.

* Do find out what strings are keeping you tied to your present lender. It may be worth staying put, even at an expensive rate.

* Do try to switch to a fixed-rate mortgage, at least for two or three years. But be prepared to pay over the odds for peace of mind.

* Do stay clear of fixed-rate savings until you are sure the interest rates are near their peak.

* Do check the sums on any buy-to-let investments. Higher interest will cut your profit margins.

* Do put spare money into the stock market if you will not need it for a few years. Times of uncertainty often produce the best value, but stick to what you know, and with which you are comfortable.

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