Your Money: End of the world as we know it

Savers and borrowers face months of uncertainty after last week's interest rate rise.
Millions of savers and borrowers will face months of continuing interest rate uncertainty as money markets come to terms with the increasingly frenzied run-up to the General Election.

Last week's decision by the Chancellor to raise base rates by a quarter percentage point, to 6 per cent, was generally welcomed as a sensible move.

Major mortgage lenders, including the Halifax and Abbey National, said they were not planning to raise variable rates from their existing levels, hovering at or just below 7 per cent - at least until the Budget on 26 November.

Gary Marsh, an economist at the Halifax, says: "Rates are probably going to steady now, depending on what Mr Clarke does in the Budget.

"We are probably looking at a slight move upwards to 7 per cent or slightly above that by the end of the year, irrespective of who wins the election."

Mr Marsh says the Budget is likely to influence a decision on base and other rates because of the way the City will view any attempt to deliver tax-cutting measures without attempting to reduce spending.

"If there is a tax-cutting Budget which simply pressures up inflation, then there will also be pressure for rates to go up," Mr Marsh says.

He adds that for the foreseeable future there is little likelihood of savings rates rising in line with the base rate increase: "Everyone tinkers a bit with their rates on some of their deposits from time to time.

"We have increased one or two of the rates on our Liquid Gold Account. But we would need to see fairly substantial increases in base rates, with a corresponding effect on mortgages, before rates go up across the board."

His comments come as Leeds & Holbeck announced it was responding to the rise by increasing the amount paid to savers on its two and three-year fixed rate bond.

Over two years, the society will pay 7 per cent gross on deposits of more than pounds 10,000, up 0.35 per cent. Over three years, the rate on the same deposit rises from 7.05 per cent to 7.25 per cent.

While both savings and mortgage rates may remain unaffected for the moment, experts predicted yesterday that last week's shock decision by the Chancellor will have an effect on the type of loans demanded by borrowers.

Chris Scales, head of development at Mortgage Intelligence, which has 400 mortgage brokers nationwide, says: "We talk to our advisers every day and they are telling us that in the past two or three days there has been a tremendous change.

"People are beginning to realise that interest rates have bottomed out and are now likely to start drifting back upwards. As a result, there is an upsurge in interest in longer-term mortgages, over four years or more."

Mortgage Intelligence is offering a four-year Bristol & West mortgage, fixed at 6.99 per cent, with an arrangement fee of pounds 275.

The rationale in favour of a slightly shorter time-frame for the fix is that it takes a borrower to about a year before the next General Election when, if the present one is any guide, rates will be lower. Borrowers will then be in a position to make a fresh choice of loans at that point.

Ian Darby, marketing director at John Charcol, the UK's largest independent broker, agrees with the perception that rates may now be at the bottom of the cycle.

He says: "Until recently, the idea of a discounted mortgage was still attractive. That is far less so as people begin to see that rates are likely to move back up - and so will their mortgages."

Mr Darby says any increase in mortgage rates should not have a major impact on the housing market itself, because the issue was one of affordability overall, which is not just determined by interest rates.

Among the good-value deals available through most mortgage brokers or Lloyds Bank branches is a Cheltenham & Gloucester home loan, fixed for five years at 7.25 per cent.

The loan carries a six-month interest penalty for early redemption and involves a pounds 495 up-front reservation fee even if the loan is not proceeded with. But it also offers a free valuation and carries no mortgage indemnity guarantee (MIG), which can save many hundreds of pounds.

John Charcol is also offering a five-year capped mortgage, which means rates are free to rise and fall under a ceiling of 7.99 per cent over that period, but will not increase above it. The mortgage allows for a review after three years, with just one month's interest penalty thereafter.

A final component of the base rate rise could be its effect on credit cards and loans. Barclaycard announced last week it would not increase rates.

Hugh Titcomb, senior banking manager at Save & Prosper, which offers one of the cheapest Visa and Mastercard cards on the market, charging 14.6 per cent, says: "I would be surprised if any company decided to move upwards on this occasion.

"Most providers already charge at least 18 or 19 per cent, with major high-street banks above that. They can afford to meet the increase in base rates on their existing margins. One could argue that given the fantastic margins they already have, they should easily be able to."

q Contacts: Mortgage Intelligence, 0800 246000; John Charcol, 0800 718191.