Protecting against rate rise pain

The Council of Mortgage Lenders CML, like many, has been unsurprised by Thursday's decision by the Bank of England to raise interest rates from 4.75% to 5%. But surprise or not, it says borrowers can do more to protect themselves against rate increases.

For a start, 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're adequately insured. Products such as mortgage payment protection insurance MPPI might be especially useful if borrowers suffer a loss of income.

Meanwhile, much has been made of the decision by some lenders to offer mortgages requiring high income multiples. However, these will only be within the grasp of a select group of borrowers who are able to pass lenders' stringent affordability and credit checks.

Michael Coogan, Director General of the CML, makes the point that Thursday's rate rise may mark the start of a cooling down in the housing market as we approach the new year. And that's 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," says Coogan.

Coogan adds that 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," he says.

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2006-11-10 11:44:49 © Moneyextra.com