Louise Cuming, head of mortgages at moneysupermarket.com, said: “This increase will have a significant impact on savers and borrowers alike. This will be a real blow to many homeowners who may not have factored in an additional Base Rate rise – indeed, many commentators failed to see it coming - so it is likely that some homeowners will have been caught short.
“The rise will be most detrimental to those on a tracker mortgage whose repayments will rise in the wake of this announcement. What is worrying is that many of these people may already be stretched to the hilt and may struggle with an increase in mortgage repayments - more so as it’s soon after the Christmas period.
“My advice, if you will not incur a penalty to switch mortgage products, is to shop around urgently, especially if you are paying the lender’s standard variable rate of around 7 per cent. In the first instance borrowers should approach their existing lender to see if they can transfer onto a more competitive rate. Where possible, those with a mortgage likely to be affected by this rate rise and who fear they will struggle with any further increases in payments should consider remortgaging to a better or fixed rate product. This will help negate the effect of any further increases and ‘future proof’ themselves for potentially more upward movement in rates.”
The Council of Mortgage Lenders (CML) director general Michael Coogan said: "The timing of this rise is sooner than we expected, although we have been forecasting higher rates. Inflationary pressure appears to be more pronounced, not least because of the prospect of higher wage growth, and we would not be surprised if rates now ended 2007 at 5.5% rather than the 5.25% we forecast back in December.
"Mortgage borrowers who are concerned about the impact on affordability can still consider a wide range of attractive fixed-rate deals. Anyone borrowing on a variable-rate basis should factor in an expectation that rates have further to rise."
Milan Khatri, the Royal Institute of Chartered Surveyors (RICS) chief economist, said: "The Bank of England's decision to raise interest rates by quarter per cent to 5.25% is of some surprise though RICS had expected a further increase to take place in February due to the continued strength of the economy. Consumer spending over the key festive season proved to be good and households have taken interest rate hikes in late 2006 in their stride. The housing market has also shown only a muted reaction to higher borrowing costs so far as new jobs continue to be created and wages are up firmly. With interest rates now up twice in three months (the last being in November) it is quite likely that housing demand will start to fall back. Affordability conditions for first-time buyers will continue to worsen due to higher mortgage interest rates and this will continue as further interest rate rises are likely in 2007."
Jeff Knight, director of marketing, GMAC-RFC, commented: “The industry has expected another rate rise for some time, but I did not expect it to happen as early as January, so this has come as a slight surprise. With inflationary pressures set to continue, I believe the market will see another rate rise later in the year to 5.5%. It is difficult to see a rate rise higher than this in the next six months, but I wouldn’t rule it out before a later reduction. There is no doubt that this rising interest rate environment will make the mortgage market a tougher place in 2007.
"The picture isn’t all doom and gloom for intermediaries. Rate rises force those with mortgages to look for better deals so new business opportunities can still be found through clients who need to remortgage. In addition, as intermediaries embrace technology they will be able to free up more of their time to do more selling.”
Stuart Law, managing director of Assetz, said: "The MPC has delivered a warning shot to businesses with this surprising rate rise so early in the year. As we enter the main wage bargaining period the Bank is shocking businesses into restraining wage rises by increasing their existing costs and showing willingness to raise rates further, thereby helping curb inflation.
"This rise is unlikely to be related to house price growth, as this is caused by the imbalance between supply and demand rather then low borrowing costs.
"We expect that wage inflation will be kept under control at 4% or less, while inflation is expected to drop back down to 2% by the end of the year. This, combined with falling energy prices, confirms that the economy is on an even keel and we are likely to see the Bank holding or lowering rates in the coming months."
