A rise in UK base rates may only be days away. An expert tells BBC News Online what the likely impact will be and how borrowers can go about weathering the storm.

We are unlikely to see a dramatic rise in interest rates in the short term.

However, as the minutes of the most recent meeting of the Monetary Policy Committee (MPC) revealed a 0.25% rise in the Bank of England base rate looks on the cards.

The consensus in the City is that base rates will be around the 5% mark by the end of 2004.

Homeowners can take comfort from the fact that the City often over-estimates the scale of future base rate rises.

But suppose that the City is right this time, how can borrowers weather the storm?

CAN YOU AFFORD A RATE RISE?

• A 1% rise on a £80,000 repayment mortgage will cost £550 a year
• A 1% rise on a £80,000 interest-only mortgage will cost £800 a year
• If base rates increased from 3.5% to 5% the average repayment on a variable rate mortgage would rise by 40%.
• Source: The Marketplace at Bradford & Bingley

Impact

A rise in base rate to 5% would mean around a 40% increase in UK variable rate mortgage payments.

Fortunately, the level of household income taken up by mortgage repayments is much lower than in the early 90's.

Of course, the rise in your monthly mortgage bill will depend on the size of your mortgage.

A 1% increase on the average ?80,000 mortgage equates to about an extra ?550 a year.

Repayment mortgage holders are protected from the impact of an interest rate rise - to a small degree - as only a proportion of their repayments goes towards meeting loan interest.

“Mortgage borrowers who have credit card and personal loan debts are most at risk from a hike in interest rates”

However, on an interest-only mortgage on the same basis, the increase would mean an extra ?800 a year.

Small interest rate rises on large levels of borrowing can have a substantial impact, so every effort should be made to reduce your borrowings now, before you get a nasty shock.

Strategy

Some mortgages allow people to overpay on their debt - if you can it is best to take advantage of this facility.

Borrowers should look to repay as much of their mortgage as possible at the current low rate of interest rates and could even take a payment holiday down the road if they wished.

If you are worried that you will not be able to afford your mortgage repayments in future, then this could be a good time to opt for a fixed rate mortgage.

Mortgage borrowers who have credit card and personal loan debts are most at risk from a hike in interest rates.

Now is the time to act and shop around for the cheapest interest rates on personal loans or credit cards.

Consumers should also be extremely cautious of viewing their property as a piggy bank to raid.

Borrowers really need to think carefully before withdrawing their equity to fund any spending impulses.

The sensible person will now be paying back debts and saving in order to cushion the blow of a likely future interest rate rise

The views expressed are solely those of Mr Bitner and are not those of the Credit Cards 4U. They are for general information only and do not constitute financial or investment advice. The information is not intended to be relied upon for the purposes of making an investment decision. Always obtain independent advice from a qualified, registered financial adviser before making any investment decisions.