Borrowers start to feel the pinch

Mortgage rates are once again on the way back up. The days when variable rates of 3.99 per cent were possible now seem to be very far away. Variable rates are now set at around 5.75 per cent, although some are as high as 6 per cent.

As a result, there are many borrowers who are feeling very stretched. Young borrowers in particular who took out variable loans in the past year, are beginning to feel the pinch.

However, the current interest rates are unlikely to mean any big problem with repayments. According to work done earlier this year by ABN Amro, real affordability problems are unlikely to arise until mortgage payments reach 6.5 per cent or more.

But for many individuals the story is different. Many young borrowers disregarded the automatic increase in their payments when their discount ran out.

Many of the discounts were very generous. The variable rate may have been 4.5 per cent but the first-year discount meant that the payment was based on a rate of 3.5 per cent.

As a result, someone with a £100,000 loan could now be facing payment increases of £120 a month from £580 for a loan repayable over 20 years to £702 at 5.75 per cent

But many who did not fix their rate or only picked a one-year or a two-year fix may now be ruing their decision. After all, fixed rates a year or two ago for three or five years were less than the current variable rates on offer.

But interest rates are set to go on rising. Most analysts expect rates to rise at least once more this year, probably in October to 4.75 per cent. That would mean mortgage repayments of 6 per cent or above.

But that is not the end of the story. If the European economy continues to recover, rates will go on rising into next year. Jim Power, chief economist at Bank of Ireland, believes they will peak at 5.5 per cent, which could mean mortgage rates of around 6.75 per cent or 7 per cent.

Others are less optimistic. Some UK economists believe the peak in official rates could be as high as 6 per cent or even 6.25 per cent and that could really cause problems for many borrowers.

But as ever there are no guarantees. There is also a possibility, that European growth may have now peaked, according to Dan McLaughlin, chief economist at ABN Amro. If that is the case, and it really is too early to tell, there may be only one more rise in interest rates with no further increases next year.

At the moment, two-year fixed rates are available at 5.6 per cent from TSB - less than many variable rates. One of the most expensive is from AIB at 6.25 per cent, the level where rates may well be at the end of the year.

Three-year loans are at a similar level. One of the cheapest is from Bank of Ireland at 5.99 per cent, while the most expensive is from AIB at 6.35 per cent. For anyone who needs peace of mind this may be worthwhile but obviously means higher repayments than borrowers are currently making, which could be a very difficult choice for anyone who is already feeling stretched.

Five-year loans are available from Bank of Ireland's 6.35 per cent to Irish Permanent's 6.85 per cent.

Borrowers should think carefully before taking out one of these loans. The peace of mind may be great but these often carry expensive penalties should you choose to get out early.

Few fixed-rate loans allow early repayments, so anyone who thinks they may be in line for a large bonus or inheritance should check this out on advance.