William Kay: Higher rates need not break the bank if you know how to fix things

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The Independent Online

Mervyn King, governor of the Bank of England and therefore the man who ultimately decides how much we must pay for loans and receive on savings, must be very frustrated.

Mervyn King, governor of the Bank of England and therefore the man who ultimately decides how much we must pay for loans and receive on savings, must be very frustrated. Since last November his Monetary Policy Committee has been steadfastly raising interest rates to deter us from borrowing, yet debt continues to become cheaper.

At the start of November the cheapest unsecured personal loan was Northern Rock's, costing 6 per cent; this week Cahoot cut its comparable rate to 5.8 per cent. Not much difference, you might think, but remember that the Bank of England's base rate is now 0.75 per cent higher.

And look at mortgages. In November, Britannia building society was offering a two-year fixed-rate mortgage at 3.99 per cent; now Northern Rock will do a similar deal costing only 1.98 per cent, although there are penalties for repaying before 2011.

But all those pale against the collapse in credit card rates. Best in November was RBS Advanta's 12.9 per cent; today Capital One charges only 5.94 per cent, not much more than the best unsecured personal loan, with all the convenience of plastic thrown in.

Credit cards are a bit of a special case, as years of consumer complaints about their high interest rates has finally sparked a surge of competition, so there is some catching up going on. But if, as we must assume, Mr King's plan was to curb borrowing, he has so far failed spectacularly. Last October we borrowed £9.2bn for personal use, mortgages included. In April, the latest figures available, that had risen to £9.8bn, and the average household is blithely handing over 19p in every pound of income just to keep banks and building societies happy.

No wonder, then, that the experts confidently expect another increase in base rate when the Monetary Policy Committee meets next week. It is all they can do, unless the Chancellor, Gordon Brown, were to sanction physical limits on lending and there is no sign of that.

Eventually, the Bank must get its way if it keeps raising rates for long enough. But it seems that consumers have been canny enough to switch out of dearer loans into cheaper loans, with the help of a banking industry that is falling over itself to lend.

So the Bank may have to keep turning the screw for longer, and the base rate may have to go as high as 6 per cent to dampen the borrowing frenzy, compared with the present 4.25 per cent and last October's 3.5 per cent. And we cannot be far off the point where lenders cannot afford to undercut one another any more, so borrowing charges must be near to their floor.

This makes it all the more important to join the rush to tidy your finances. If you cannot repay debt easily, switch to the lowest rate you can find, using our Best Buy tables on pages 16 and 17 or by visiting moneysupermarket.com.

Mortgages are clearly the most difficult debts to shift in a hurry, but a fix for two or three years should see you through the hump in rates. If you would feel more comfortable fixing your mortgage for longer, fixes for up to 10 years are widely available.

* Something tells me that when Halifax turned from a mutual building society into a plc bank, the management took their new devotion to shareholders over customers a little too seriously. It is not so long since they brushed under the carpet the scandal of charging two different mortgage interest rates. The Financial Ombudsman ordered it to compensate those who had complained, leaving others in the dark.

Now it is using the latest Bank of England base rate rise as an excuse to skim money off savers. It chose last Sunday, in the middle of a bank holiday weekend, to leak out details of its new rates. They leave millions out of pocket, joining those already short-changed by Halifax's internet sister, Intelligent Finance. Perhaps James Crosby, chief executive of HBOS, Halifax's parent, should lighten up a little.

Lifestyle choices don't come cheap

Welcome to the world of touchy-feely finance. An ex-theatre producer, Bruce Athol Mackinnon, and Tim O'Leary, a former Royal Navy submariner, are about to launch Life Medicare, the latest service under the life-world.com banner, which already covers finance, travel, free time, property, commercial and motoring.

They like to think of themselves as running a club, for would-be customers have to register, although there is no charge. In practice they act as brokers and introducers to a range of product providers: Western Provident for health insurance, Lloyds TSB for credit cards, Andrew Lloyd-Webber's Really Useful Theatres for theatre tickets and so on.

Their literature is careful not to claim they will lead you to the cheapest deals; it talks about being highly competitive, offering substantial savings or exciting promotions. Mr O'Leary fondly imagines life-world's customers will have checked out rival prices before committing themselves. But this concept seems more likely to appeal to people who want a one-stop shop which they feel chimes in with their own laid-back world view, and are not too fussy about price.

Mr Athol Mackinnon and Mr O'Leary have wisely signed up some first-class partners such as John Lewis, Insure&Go and the Share Centre, but their lack of experience does not suggest that they are going to drive the hardest bargains on customers' behalf. Touchy-feely can come a touch expensive.

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