Borrowers braced for rate rise

HOMEBUYERS are today facing their first interest rate rise for nearly four years. The widely forecast move from the Bank of England is expected to usher in a new era of increasing rates after buyers enjoyed the lowest borrowing costs for half a century.

The expected 0.25% hike to 3.75% - due at noon - would add an immediate £25 to £30 a month to the typical £180,000 South-East mortgage. But it is the longer-term prospect of further increases that is ringing alarm bells.

City economists are now pencilling in base rates of 5%- meaning a typical mortgage rate of 7% - by the second half of next year, enough to add hundreds of pounds to monthly mortgage bills.

On top of that, credit and store-card issuers are certain to bump up their already steep interest rates (APRs), piling further pressure on the millions of people who have taken full advantage of the bargain credit deals.

Interest rates last rose in February 2000. Many City analysts believe the new rise will be the first of many leading to the end of the house price boom.

Roger Bootle, of Capital Economics, said: 'The years of people being able to borrow money for nothing are coming to an end. By spring 2004 I expect house prices to start falling, ultimately by around 20% from the peak of 2002.'

However, current high levels of employment make an early Nineties-style epidemic of repossessions unlikely.

Malcolm Hurlston, chairman of the Consumer Credit Counselling Service, said today's expected rise was 'a salutary jolt' that should shock people into sorting out their finances, particularly in the run-up to Christmas.

The service has received more than 130,000 calls this year from borrowers hopelessly 'in hock', he said.

The average caller was aged between 25 and 40 and owed around £20,000 to 11 lenders, usually a mixture of credit cards, store cards and catalogue credit providers.

Dan Levene, a spokesman for the National Association of Citizens Advice Bureaux, said any interest rate rise was 'inevitably followed by people coming to see us looking for advice a few months later'.

He added: 'A 0.25% extra for someone already deep in debt is going to hurt them a lot.'

City puts its money on rise

SHARES trod water and sterling slipped into the red ahead of today's rate.

Chancellor Gordon Brown appeared to add his endorsement, acknowledging the economy was picking up. 'In the new conditions of growth strengthening even further over the next few months, the proactive monetary and fiscal policy is the best guarantee of stability,' he told The Times.

However, trade unions and some business groups made a lastminute appeal to the Bank's monetary policy committee to sit on its hands. 'The Bank must resist the bullying voices coming from the City and stand firm,' said Trades Union Congress economist Ian Brinkley. The British Chambers of Commerce said an increase was unjustified.

The FTSE 100 index was down 0.4 points at 4303 and sterling was off nearly a cent at $1.6750.