Muffled groans across city as Bank puts rates up again

Forewarned wasn't forearmed says Angela Pertusini- so when the base rate of interest went up to 5.75 per cent this week, homeowners wondered how they could cut costs now

THE FIRST Thursday in the month holds a particular horror for the British homeowner because this is the day that the goliaths of the Bank of England gather together and announcements on the interest rate are made.

Last week they raised it again - the fifth time in 11 months which makes you wonder if they're not getting a bit fond of turning the old thumbscrews - and the base rate is now at 5.75 per cent. Historically, this is hardly a savage level of interest but, in the context of the past few years of ludicrously cheap money and ridiculously expensive property, it is beginning to hurt and doom-mongers are predicting, gulp, another quarter of a per cent in autumn.

Evan Davis, the BBC's delightfully enthusiastic economics man, posited the theory that rate rises take about nine months to bite but, knowledgeable as he is, I would have to disagree with him on this one.

Despite everyone living in the full expectation that it was coming, that forewarning did little to cushion the blow and, just like watching British hopefuls being summarily but predictably slung out by the second round of Wimbledon, a muffled groan of anguish echoed across the streets of London.

Over the past year, someone with a £250,000 mortgage will be paying more than £250 per month more in interest on a variable rate. Probably not enough to put them on the streets but more than enough to eat into the things that make living in London worthwhile - a couple of good meals at decent restaurants, a pair of shoes and a really nice haircut, a long Euro-hop weekend. The sort of fripperies that compensate for the Tube journeys, the terrorism, the hellish expense of living here.

The problem is that, first, many people are carrying mortgages far higher than the illustrative £250,000 and, second, once you forego the little treats and luxuries, what do you cut out after the next series of rate rises?

Childcare? Food bills? Petrol? As if in answer, a survey by the website MoneyExpert.com earlier this week found that there have been a frankly horrifying 460,000 missed mortgage payments over the past six months across the UK, up from less than 250,000 in the last six months of 2006.

To underline these woes, Bovis Homes, the newbuild giant, has issued, well, not a profits warning exactly but a sort of deep sigh of disappointment. It has noted a slowdown among buyers and now only expects to match rather than trounce its 2006 figures of a £132million profit.

Such was the shock at these paltry results that its share price fell by 8 per cent in a single morning, which gives some idea of the unrealistic expectations investors may have in the ability for property prices to soar ever upwards.

(Incidentally, other large developers such as Barratts, also saw their share price fall on the back of the announcement.) But wherever there is a cloud there is a silver lining and the bottom feeders are already beginning to trawl for bargains among those who may be, ahem, over-exposed.

Previously you would recognise these seedy specimens at the back of auction rooms putting in a last-minute bid on a lot no one else wanted but now they have become institutionalised. Property fund Invista has started a new fund specifically to buy up commercial property from, I would guess, small-time investors who leapt rather too late onto the bandwagon and are now looking at yields of 4 per cent against mortgage rates of 6 per cent or more.

"Many investors and syndicates of investors will need to refinance soon, but might not want to pay the higher charges as they see values sliding," says Invista chief, Duncan Owen. "It is . . . a negative equity situation in commercial property. We think there will be a big market from these sellers in 2008 and 2009."

So is this correction time at long last or just one of the collective wobbles that occur periodically (generally before another surge)?

The summer doldrums certainly give the impression that everything is sluggish and it's all downhill from now on, but hold tight for autumn and a new round of buying and a new round of interest rate rises.