Mortgages rising to reflect interest rate hikes

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Wednesday 18th April 2007

Mortgages are among the greatest affordability risks for Britons following recent interest rate rises, according to the Alliance Trust.

A new index devised by the trust compares changes in consumer spending with the "financial reality", a figure based on consumers economic background, household budget and net wealth.

While historically these two indicators have remained close to one another, the trust warns that expenditure rose steeply in 2006, compared with a fall in the financial reality index.

"Consumers are heading for an increasingly tougher time to maintain their lifestyles financially," the trust predicts.

The report notes positive impacts on affordability as "petrol prices have fallen from recent highs and recent pay deals have helped to improve real earnings".

But it continues: "Mortgage payments have risen once more, reflecting the latest rise in interest rates."

The Bank of England this week noted that lending secured on property stayed strong through February despite a 0.25 per cent rise in interest rates in January.

Meanwhile, mortgage broker London & Country (L&C) is urging homeowners wishing to switch to a fixed-rate deal to do so immediately.

Following the news that inflation exceeded three per cent in March, the firm suggests that lender Northern Rock could withdraw its fixed-rate mortgages at any moment, while Alliance & Leicester has done so already.

James Cotton, mortgage specialist at L&C, says: "Fixed rates are proving very popular at the moment as people seek protection from rising rates.

"As long as youve got your fixed-rate application into the lender, that rate will be honoured, so dont hang around."

Howard Archer, chief UK and European economist at Global Insight, terms a May interest rate rise a "stone dead certainty" and adds that the Bank of Englands monetary policy committee may even consider a 0.5 per cent increase at next months meeting.

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