Extra £200 on the mortgage

FAMILIES have been warned to brace themselves for much bigger mortgage repayments when their fixed-rate deals run out. About 450,000 home owners could have to find £200 a month extra when their two-year deals come to an end in 2005.

In 2003, 36% of buyers opted for fixed-rate mortgages, for which the average interest rate was 4.23%. Since then, the Bank of England has increased interest rates and that, coupled with the threat of more rises, means the average fixed-rate deal now hovers at 5.5%. The average standard variable rate is 6.64%.

A family who took out a 25-year repayment mortgage for £100,000 in 2003 at 4.23% interest fixed for two years would currently be paying £546 a month.

If, at the end of this period, they switched to a new fixedrate deal at 5.5%, they would find their repayments rising to £621 a month, or £75 a month more. If they were forced to move to an average variable rate, they would find themselves paying £692 - £146 more a month, or £1,752 a year.

The differences will be even greater for those with interest-only mortgages. A family who took out an interest-only mortgage at 4.23% fixed for two years would have been paying £352 a month. If they moved to their bank's variable rate at 6.64% their payments would rise 56% to £553. Over a year, that would mean having to find an extra £2,412.

Sean Gardner, of the website Moneyexpert.com, said: 'Home owners who took out fixed rates two years ago received fabulous deals and have done very well. However, the interest rate climate has changed decisively since then, and they have to take action or risk a massive rise in their payments.

'Doing nothing is not an option. Someone moving from a two-year fixed rate they took out in 2003 to the standard variable rate would really suffer. A £200-a-month increase on the average £100,000 mortgage would raise their monthly payments by more than 50%. It is essential these home owners shop around for the best deal.'

Last week, a report by world economists warned that British families could be hit hard by rising interest rates and falling house prices. The International Monetary Fund said the UK economy was still in good shape, but warned people not to be complacent. Interest rates could rise by even more than expected - to more than 5% - if the US dollar remains weak and inflation picks up. This could send home owners' finances spiralling down and even plunge Britain into recession, the experts warned.

A report by an industry analyst said it expected mortgage lending to fall by 10% over the next three years as the housing market falters. Datamonitor said home owners and lenders would find the next few years tough.