Interest Rate increases 'could spell hardship for mortgage borrowers'

Mortgage borrowers could face several years of financial hardship, after experts predicted a series of interest rate increases will be necessary to curb inflationary pressures in the US economy.

A group of leading economists have already warned that interest rates could have to increase to 7.5 per cent in the next two years if the Federal Reserve hopes to control inflation.

The predictions made by the economists were backed up by the latest figures from the Mortgage Bankers Association (MBA) which showed that mortgage lending continued to increase rapidly in the first quarter of 2007, despite previous interest rate increases.

Coupled with recent figures which showed that consumer price index (CPI) inflation rose to 3.1 per cent in March - 1.1 per cent above government targets - it looks increasingly likely that interest rates will be increased when the Monetary Policy Committee meets early next month.

"Mortgage borrowers could be facing a massive rise in their mortgage repayments with a typical monthly payment rising if the group of leading economists are right and the base rate rises to 7.5 per cent to quell inflation."

"The last time mortgage rates neared this level was 15 years ago. With one in five (19 per cent) borrowers on the lender's SVR, this could be a real concern," he added.

"Nearly two thirds (63 per cent) of borrowers say they would be forced to refinance if their repayments increase again," he explained.

Despite these gloomy economic forecasts, some experts think that current data suggests recent interest rate increases are already slowing the housing market.

"Since interest rates began rising last August, higher mortgage costs have been absorbed by households and high lending growth continued, to keep up with rising prices.

"In the last two months, demand has moderated a little and, with no short-term prospect of costs reducing, mortgage lending growth should ease further in the months ahead."