Homeowners hit with interest rate rise

The Bank of England has raised interest rates a quarter of a point to 4.75%. The rise is the fifth for homeowners since November as the Bank of England prepares for further action to keep inflation in check.

The quarter of a percentage point increase had been widely expected as the Bank attempts to keep a lid on inflation and ensure consumer spending and house prices do not take off again after tentative signs of a slowdown.

Industry leaders were relieved the Bank stopped short of a half-point increase, although fears remain that the Monetary Policy Committee (MPC) could yet sanction back-to-back increases next month.

The Abbey was the first of the major lenders to pass on the full impact of the rise.

Monthly repayments on a £65,000 loan will increase to £449.09 from £438.88, based on a new rate of 6.75%.

But first-time buyers, who are more likely to have a loan of around £100,000, will see their repayments rise by more than £15 a month to £690.91, while those who are heavily mortgaged with a £200,000 loan will need to find an extra £31.

Those same borrowers have already seen their bills rise by £40 after the MPC sanctioned four other interest rate hikes as it attempts to cool the housing market and ensure stronger growth does not feed through to higher inflation.

Analysts have warned of back-to-back rate rises if household activity does not slow down soon. Sky-high oil prices are adding to the inflationary pressure, although the higher energy costs may also play a part in dampening consumer spending.

Earlier this week the CBI said higher interest rates had put the brakes on retail spending during July, while a separate study found growth in the service sector at its lowest level since June of last year.

Further evidence that the housing market is slowing down came when the Halifax reported an easing in price growth for the second month running.

However, economic growth is now running 3.7% higher than a year earlier, following an improvement in output of 0.9% in the second quarter.