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Good time for clients to review deals

Virtually everyone was taken by surprise when the base rate rose to 5.25% this month – its highest level in five and a half years.

It wasn’t the increase that caught people off guard but its timing. For some reason we all thought the Monetary Policy Committee would be kind to us and delay an increase until at least February. But now we know the MPC had little choice given the statistics on housing, consumer spending and inflation. Inflation has now hit 3%.

The MPC’s top priority is to keep inflation around 2%. According to the Consumer Price Index it is now running at 2.7%. Talk about real inflation – how much households’ costs on mortgages, food and everything else are actually rising – can easily double this figure.

Now official inflation is at this level, Mervyn King, the governor of the Bank of England, is in the unfortunate position of having to write to chancellor Gordon Brown explaining where he’s gone wrong, so who can blame the MPC for the rate rise?

It won’t be long until your clients start to feel the pinch. Analysis by mform.co.uk found the average mortgage in the UK is 91,850. For an average SVR mortgage on this amount the increase will add an extra 178.32 a year, or 14.86 a month, to repayments. People already struggling to find the cash for their mortgages – for example, those who have been able to borrow up to 5 x income – will be feeling the strain. This is a good time for brokers to sit down with their clients and review their deals.

Unfortunately for me, one group of people who will be hit hard are landlords. Although there will continue to be a demand for rental property, those with tenants already in place – like myself – will see repayments rise but will be unable to pass this on.

With leases in place specifying the rent, they can’t put it up overnight. Being a landlord is not that lucrative a position for many right now, but once again remortgaging could be an answer.

Also this month, payment protection insurance was hit with another blow. The Financial Services Authority is upping the ante by launching the next stage of its study into the market. Let’s hope it continues to distinguish MPPI sold by professional brokers from PPI sold by car salesmen.

And brokers shouldn’t be put off selling MPPI as it is now more vital than ever, given the increased pressure borrowers are under because of rising interest rates.

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