Mortgages

Brokers are urging borrowers to take out fixed-rate deals for a minimum term of five years to guard against interest-rate rises.

While Bank rate is not expected to go up until next year, the cost of funding mortgages has already moved in anticipation.

Last week, Nationwide, Britain’s biggest building society, raised its five-year fix for borrowers with a 40% deposit by 0.86 points to 5.84%. Northern Rock also raised five-year deals by 0.2 points last week.

Ray Boulger of John Charcol, the broker, said: “There is no question lenders are going to pass on these rates. The message for borrowers wanting to take a fixed rate is clear — get in now or miss out on the current relatively low rates.” Chelsea had a five-year deal at 4.5% last week but this was pulled on Friday.

The next-best deal, from Mansfield building society, is at 4.59% for those with a 25% deposit, with a fee of £999 — although it is unlikely to last the week.

Repayments on a £200,000 loan would be £765 a month with the Mansfield deal, but would rise to £1,000 if the typical fix hit 6% — an extra £2,820 a year, so it is worth acting fast.

Melanie Bien of Savills Private Finance, another broker, said: “We would not be surprised to see a 0.5 point rise across the board. An average five-year fix at 6% is much closer to the historical average.”

The best two-year deal is from HSBC at 2.49% but the fee is as high as £3,800 on a £200,000 loan with a deposit of 25%.

Savings

Despite the prospect of rate rises, interest rates are so low on new variable accounts that you are likely to be better off taking out a short-term fixed-rate bond.

The best variable rate account is from Intelligent Finance’s internet account at 2.85% on a minimum deposit of £1, after it raised rates by 1.1 points last week. However, the top-paying one-year bond from National Counties building society pays 3.91%, so rates would have to rise by more than 1.06 percentage points before you would be better off.

Currency

Last week, sterling hit its highest level against the euro for the year, reaching ¤1.17 after the near-parity levels of ¤1.02 in December. However, prospects for sterling against the dollar are more limited.

John Higgins of Capital Economics said: “The general improvement in risk appetite is reducing the safe-haven appeal of the dollar. However, as we move through the summer, the strength of the recovery will be disappointing, risk appetite will fade and the dollar will gain a little more strength against the pound.”

Investments

The sharp rise in the outlook for rates is bad news for investors who have piled into corporate-bond funds, as their yield looks less attractive relative to other assets so prices fall and yields rise.