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Interest rates time bomb; MORTGAGE AGONY FOR MILLIONS.


BRITAIN is facing a housing time bomb, with millions of homeowners living in fear of interest rates rising.

The Bank of England's base rate has remained frozen at a record low of 0.5% for more than two years - slashing repayments for borrowers with variable rate mortgages.

But one thing is certain - it won't last. The Bank's Monetary Policy Committee meets again next week, although most experts have pencilled in the first rise for this autumn at the earliest.

However, with so-called experts being proved wrong many times in the past, the question for the eight million borrowers affected by a rate rise is whether to stay on their current deal or get a new mortgage that will guard against a sharp rise.

It is a particularly tough call for the estimated two million homeowners who remain the big winners from record low rates as they're currently paying between 0.65% and 2.5% interest on their loan.

A large number of them are the customers of Nationwide, Cheltenham & Gloucester (C&G) and Lloyds TSB who reverted to the lenders' standard variable rate of 2.5% when their deal came to an end.

One million of Nationwide's mortgage borrowers are on this rate - known as the BMR - saving pounds 600million in the last year alone.

They, like the others who have benefited, are likely to automatically see repayments increase along with the Bank of England's base rate.

If they wanted to switch to a fixed rate deal, the cheapest two-year product is from the Yorkshire Building Society at 2.99%.

However, it charges a hefty pounds 995 fee and you'll need at least a 25% deposit.

If you can only put in 10%, the choice is more limited and the cost much higher.

The Yorkshire is once again the cheapest, but the rate jumps to 4.99% and the same pounds 995 fee applies.

For those affected, and as long as they can afford to, it may make sense to overpay their mortgage every month to reduce the loan required when they do switch and in turn benefit from the cheapest rates.

The decision about whether to switch or not is probably easier the higher the rate you're currently paying.

While many Nationwide, C&G and Lloyds' customers are quids in, the average standard variable rate across the industry is nearer 4% and some smaller lenders are even charging up to 6%.

In these circumstances, customers who opt for a fixed rate deal would have the double benefit of reducing their repayments and ensuring that those payments don't increase.

But another big decision is how long you want to be tied into a fixed rate deal for? Mortgage guru Ray Boulger at broker John Charcol last week urged borrowers to ignore most two-year fixed deals.

But his argument was based on the assumption that rates, when they do rise, will creep up slowly. Those who are wanting longer security could opt for a five-year fixed rate deal instead. The Chelsea Building Society is the current cheapest at 3.99%, but you'll need at least a 25% deposit and the fee is a chunky pounds 1,995. The best deal for those with a 10% deposit is the Co-operative Bank's 5.89% with a pounds 999 fee.

There is also a hybrid mortgage option, which allows you to go for a tracker mortgage and then switch penalty-free to one of the lenders' fixed rate deals later.

For example, the Woolwich has a tracker charging 1.97% over the base rate (currently switched 2.47%) that allows customers to change to a fixed rate within the first two years. However, you could be hit with two fees - pounds 999 for the initial deal and another when you switch - and you won't know what the fixed rate will be until you transfer.

Those after more certainty could consider a product from Accord that starts with a two-year base rate tracker at 1.79% (currently 2.29%) before switching to a fixed rate deal at 4.44% for the last three years. David Hollingworth, of broker London & Country, said: "Interest rates will rise, but gradually. Sticking on a variable rate is ideal but not everyone can chance it.

"If you're looking for security consider a five-year fix. They are more expensive but give longer protection."

We're all living in fear

FORMER software engineer Colin Taylor fears an increase - even though it's taken until now to benefit from the base rate cut.

Colin, 47, from Swanscombe, Kent, was stuck on a fixed rate deal with Cheltenham & Gloucester, paying pounds 760 a month on a pounds 90,000 balance.

After losing his job last June, the married father-of-one has eaten into a pounds 25,000 pay-off so he can meet his repayments.

He has only just begun to save nearly pounds 100 a month after the fixed-rate deal ended in April and he switched to C&G's J is standard variable rate of 2.5%. But any rate rise will eat into this saving, with a 0.25% increase adding around pounds 11 a month to his repayments and a 0.5% rise costing him pounds 23.

He said: "It's going to be a big problem for us if rates go up again and I really don't know what we will do.

"I joke about saving our cardboard boxes in case we need them but it feels like that might not be so funny soon."


ANXIOUS Colin Taylor is unsure what lies ahead
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Publication:The Mirror (London, England)
Date:Jun 1, 2011
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