Home loan rates on the way up

MORTGAGE misery will loom for millions of homeowners this week as official figures are expected to confirm that interest rates will rise before Christmas.

The Bank of England is already poised to increase the cost of borrowing for the first time in almost four years. Only one vote in the nine-member monetary policy committee kept base rates unchanged at 3.5% at its meeting earlier this month.

This week, figures for consumer credit and mortgage lending in September are likely to strengthen the case for a rise to choke off what has become a nationwide debt epidemic.

For someone with a £100,000 variable rate mortgage, an expected base rate rise from 3.5% to 3.75% would mean an immediate increase in monthly payments of nearly £15, to about £570.

If base rates hit 5% by the middle of 2005 - now widely forecast - monthly payments on the same mortgage will shoot up by more than £88.

This will drain money from purses and wallets, hit High Street sales and spur many borrowers to cut outstanding debts.

And it is the same story across the Atlantic. America's central banker Alan Greenspan is expected to hint at Tuesday's meeting of the Federal Reserve Board that US rates are also on their way up.

It was Greenspan who started the downward trend with two rate cuts in January 2001, and 11 cuts since then, taking US rates from 6.5% to just 1%.

Peter Dixon, economist at Commerzbank, said: 'Greenspan and his colleagues do not actually have to raise rates to influence borrowing costs. They don't even have to say they are thinking about it. All they have to do is say that the current-bias towards lower rates is now over, and put the Fed's engine in neutral. Once you do that, markets think 'This is it'.'

In Britain, publication last week of the minutes of this month's MPC meeting surprised City analysts, who had pencilled in February as the earliest likely date for a rate rise. But with the committee split five to four on whether to increase rates this month, a rise seems imminent.

Not everyone believes a November rate rise is a good idea. Geoffrey Dicks, economist with the Royal Bank of Scotland, said: 'Much to my astonishment, it seems they are going to push up rates ahead of Christmas.'