Ray Boulger, of John Charcol, commented: “The big news would have been if Bank Rate hadn’t been increased, not the fact that it has, since the increase was so widely tipped. It takes Bank Rate to a five year high and it is only two months since most homeowners on variable rate mortgages started paying for the last increase. This further hike by the Bank of England suggests that when the Bank’s Quarterly Inflation Report is published next week it will suggest that it considers the risks on inflation are still on the upside. The last rate rise three months ago so far appears to have made little impact on the housing market, although there are now some early signs of a slowdown.
“August’s quarter point rise, the first change in 12 months and the first rise in two years, had little impact on consumer spending or confidence but a second rise coming in quick succession will be different. This latest rise will expose millions of homeowners to significant additional mortgage costs. However, borrowers still paying their lender’s standard variable rate (SVR) are collectively paying £43 million over the odds, a bill which most could avoid by switching to a better rate. Not only that, a switch could result in them paying much less than their pre Bank Rate payments. With the money markets expecting another rise in three months time, it’s crucial that homeowners seize the moment and assess their mortgage situation now – otherwise they run the risk of losing thousands of pounds.”
Boulger continued: “We’ve seen the withdrawal of the best value fixed rate deals recently, which has further changed the face of the mortgage market. Although there will always be those a large number of borrowers who need or want the security of knowing their monthly repayments it’s important to take all factors into consideration when looking for a mortgage. In the current market tracker mortgages generally provide the best value products unless one expects Bank Rate to increase beyond 5.25%.
“The worst affected homeowners following today’s Base Rate will be those who took advantage of good fixed rate deals two years ago and will shortly be switched to their lender’s SVR unless they take action.”
Commenting on the rise, the Council of Mortage Lenders (CML) director-general Michael Coogan said: "Financial markets have been anticipating a rise in interest rates since the last one in August, so the news should come as no surprise to anyone. A quarter point interest rate rise on a typical £120,000 repayment mortgage equates to around an extra £20 per month.
"In recent months concern has been raised about lenders making credit too freely available and borrowers taking on more debt than they can sensibly manage. The rate rise will undoubtedly fuel these fears. But borrowers can do a number of things to protect themselves against further interest rate rises, and many are already doing so. For example:
* Borrowers can take out a fixed-rate mortgage. This will lock them into a fixed level of repayments for a period, and will give the borrower certainty in their monthly mortgage repayments. This year has seen high numbers of people taking out fixed-rate deals (60% in August) - showing that many borrowers are keen to protect themselves from the effects of a rate rise.
* Borrowers can also mitigate the effect of any change in their financial circumstances by making sure they are adequately insured. Products such as mortgage payment protection insurance (MPPI) might be especially useful if borrowers, suffer a loss of income.
* While much has been made of the decision by some lenders to offer mortgages requiring high income multiples, these will only be within the grasp of a select group of borrowers who are able to pass lenders' stringent affordability and credit checks."
Coogan added: "The rate rise might mark the start of a cooling down in the housing market as we approach the new year, but this is not necessarily a bad thing. This year has seen record levels of mortgage lending - almost on a monthly basis - and modest increases in mortgage costs will help to maintain a sustainable environment.
"But borrowers should be warned that financial markets are expecting yet another rate rise by next spring and now is the time to take action to protect themselves. Borrowers should be factoring in to their finances the effects of at least one more rate rise, and making sure that they are shielded from any risks this situation might bring."
Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: "This was one of the most eagerly anticipated base rate decisions in months, but it was also one of the most predictable. The combination of strong economic growth, money supply growth at a 16 year high, and house price inflation approaching the 10 per cent mark, meant the MPC had no choice but to press the monetary brakes with a rate rise.
"If the MPC had not moved to raise interest rates, it would have run the risk of letting inflation expectations escalate, which would have encouraged demands for higher wages. So, by choosing to put rates up, the MPC has shown that it is serious about reducing inflation and this will help to dampen inflationary pressure in the future.
"Whether further rate rises might be needed in coming months is another question and will be the subject of MPC deliberations as new data comes in."
Milan Khatri, the Royal Institute of Chartered Surveyors' (RICS) chief economist, said: "RICS welcomes the Bank of England's decision to raise interest rates by 0.25% to 5.0%. By acting in a timely manner, the modest rise in interest rates will help to cool the housing market but at the same time promote wider economic stability and prevent inflation pressures building. House price figures from the Halifax confirm that the market has shrugged-off the August interest rate hike with property price inflation at close to a double digit pace (for the year to October prices rose 9.7%), more than twice that of wages. The interest rate rise, together with possibly one more in early 2007, should help to produce a "soft-landing" for the housing market, giving rise to a more stable market environment for buyers."
