Fear mortgage rates will soar

MILLIONS of homebuyers were warned to brace themselves for a leap in mortgage bills only days after the General Election. Gloomy economic reports suggested interest rates are poised to jump to as much as 5.5% from 4.75%.

Such a swingeing increase would hit many Britons hard and raise searching questions about the state of the economy under Labour.

The threat of mortgage misery grew with evidence that the Bank of England is likely to raise interest rates to clamp down on surging inflation.

Its monetary policy committee was due to announce its monthly verdict on interest rates on the morning of 5 May, as the nation goes to the polls. But Bank Governor Mervyn King has put the decision back to 9 May in a move he said was needed to avoid the decision becoming mixed up in the political process.

Minutes from this month's MPC meeting showed that pressure was growing for a rise from 'hawks' arguing that growth in factory output and rising oil prices were pushing up costs. They were outnumbered by 'doves' and loans rates were frozen for the eighth month in a row. But the 'doves' also warned that they could change their minds if inflation increased.

Crucially, on Tuesday official figures showed that inflation had jumped to 1.9%, the highest for seven years. The increase came after rising energy costs started to take their toll on the price of goods and services.

On a typical £115,000 mortgage lasting 25 years, monthly repayments are now £732 per month. If base rates rise to 5%, it would cost an extra £18 per month, or £216 a year. If they go up to 5.25%, monthly repayments will be £36 higher, an annual rise of £432. But if base rates soar to 5.5%, monthly repayments will be £54 higher, a hefty £648 extra a year.

Some economists think borrowing rates may need to rise in stages to 5.25%, or even higher, if the Bank of England is to meet its inflation target of 2%.

In another blow, the Council of Mortgage Lenders warned that higher interest rates may be needed to cool the borrowing spree which has left Britons owing £1 trillion to banks and building societies. Despite this huge debt, the amount owed on mortgages rose by £8bn last month.

CML director-general Michael Coogan warned: 'As there is a risk of an early interest rate rise, households should consider what steps they can take to ensure they can meet their commitments.' He suggested those with a standard variable rate mortgage switch to a cheaper special deal. Housing experts fear an escalation in mortgage costs could herald the return of negative equity and repossessions.

Families could also have to contend with tax rises. Treasury figures yesterday showed that public finances were still in the red, with the Chancellor having borrowed £34.5bn in the year to April. Financial experts said Gordon Brown had originally promised to borrow £ 100m less than that.

Meanwhile, the respected National Institute of Economic and Social Research think-tank repeated warnings that there was still a black hole of at least £11bn in the Government's accounts. It warned that Brown's predictions for next year were too optimistic, with revenue needing to rise or spending needing to be cut.