Borrowers are facing larger repayments than imagined

Most borrowers will soon be making far larger repayments than they would have imagined just months ago. Interest rates have been going up far quicker than almost anyone imagined since last November, when official European Central Bank rates were an incredibly low 2.5 per cent.

At that time, there was concern about global financial deflation and the possibility that the world could be heading into a severe recession.

That fear soon disappeared and interest rates began returning to normal levels. In November, there was a half a percentage point rise, followed every six weeks by quarter point rises, until last week's half point increase. That is intended to draw a line under further increases until September at least.

According to Jim Power, chief economist at Bank of Ireland, the rate increases are likely to continue as the economy continues to pick up. Interest rates will be 5 per cent at the end of this year and if the economy keeps growing, they could be as high as six per cent at the end of 2001, he warned.

Lenders are likely to charge between one 1.5 percentage points over these levels.

AIB was the first to announce a rate increase and it also made up for lost ground by putting 0.7 of a percentage point on to mortgage rates. This will come as an unpleasant surprise for anyone who failed to fix their rate last autumn and who will now be facing into higher repayments. Someone with a mortgage of £100,000 over 20 years will have seen repayments rising from £605 last November at 3.99 per cent to £682 now on an interest rate of 5.39 per cent. For any borrower who had stretched themselves to buy the house in the first place, this could prove difficult.

If interest rates do go up another half a percentage point by the end of the year, the repayments on a 5.89 per cent mortgage would be £710 and, if rates continue rising next year, that repayment on a rate of 6.39 per cent would be £739, while loan rates of 6.89 per cent would be £768.

Of course, there is no guarantee that rates will continue rising, but probability is that they will.

Anyone who took a two-year or three-year fixed rate loan last year will be feeling vindicated. But if you missed that, is it worth considering fixed rates now? Two-year and three-year fixed rates are available at around 5.8 per cent or 5.9 per cent. So, if you believe Mr Power's theory - which is shared by many analysts - that rates will continue to rise next year, fixing could be a good idea. Certainly, at the time of writing, these loans were available but they are likely to be withdrawn sooner rather than later.

A TWO-YEAR fix on a £100,000 loan over 20 years with TSB, the cheapest lender on the market, would cost £693 a month at a rate of 5.6 per cent and the cheapest three-year loan is also TSB and Superquinns Tusa at a repayment of £699. These are not significantly higher amounts than many will be paying next month on variable rates.

But the usual warnings apply. There is no guarantee these will prove cheaper on the long term and they are completely inflexible - capital repayments are generally not allowed and the penalties to get out can be large.

One effect of rising rates is that they are likely to help slow down house price increases; the thought of rapidly rising rates is likely to have a strong psychological impact on people looking for a mortgage.