Base rate at 5.75% - Protect your mortgage, personal loan and savings

What can you do to protect yourself from higher interest rates? Anyone with an average mortgage (£94,00 according to the Council for Mortgage Lenders) will now, on an interest-only basis, be paying almost £100 a month more for the mortgage than they were before rates started going up last August.

As Moneyextra reported previously (How to deal with rising mortgage costs), millions of homeowners will have had that shock deferred because they're on fixed rates. But many of these fixed rate deals are coming to an end over the summer.

How big an interest rate shock are you likely to face? Forewarn yourself by checking just what higher interest rates could do to your monthly mortgage payment with Moneyextra's new calculator - What if interest rates change?

The Bank of England raised its base interest rate to 5.75% on 5 July, the fifth increase since last August and a new 6-year high for borrowing costs. The rise had been widely expected after some fairly heavy-handed hints from the Monetary Policy Committee (MPC). Some analysts have already been talking about a further increase to 6% while others say the MPC will now 'wait and see'.

Simon Ward, Chief Economist at New Star Asset Management commented, "We expect the MPC to go on hold at least until October as it awaits evidence on the impact of its most recent moves."

Ian Kernohan, Global Economist at RLAM adds, "Given that the effect of previous increases is still to feed through, a further move to 6% or beyond would pile even more pressure on the UK consumer and risk overkill. I expect a majority on the MPC will want to wait and see before sanctioning another rise."

The prospect of yet another interest rate rise is worrying enough for hard-pressed consumers but it is possible that we may now be at the peak of the interest rate cycle. However, that is of little comfort if you're struggling with your mortgage and other borrowing commitments now.

Any mortgage borrower still paying their lender's standard variable rate should switch to a cheaper mortgage now. There is little realistic prospect of interest rates coming down until well into 2008 at the earliest. Paying more interest than you need to won't pay off your mortgage any faster.

What you could do is maintain your current level of payments on a cheaper interest rate and reduce your outstanding debt. Why not check out the benefits of overpaying your mortgage to see how much faster you could really become a homeowner without being in hock.

05 July 2007 © Moneyextra.com

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