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Nothing to fear from another base rate rise

It is almost certain that the Bank of England will raise interest rates this month, reaching 5% for the first time since 2001. Some are already describing this as a done deal.

But the good news for the mortgage market is that it is in a solid position to absorb a rise after what has been a great 2006 so far.

While some of the recent strong momentum may be lost, the rise should cause few in the market any sleepless nights.

A decision to increase rates would be sensible. Inflation is 0.4% above its target and the economy is performing stronger than expected.

While energy prices have come down recently there are indications that inflation is creeping back onto the high street. This could lead to further inflation during the early 2007 wage rounds. With the next inflation report out this month, now is the obvious time for a rate rise.

It is a testament to the strong position built up this year that we can face the prospect of a second rise in three months without huge concern. It will almost inevitably mean that mortgage approvals reduce slightly – by 5% to 15%, according to Council of Mortgage Lenders’ estimates – and it could have a minor impact on confidence.

But the market took the surprise 0.25% August rate rise in its stride. This time, an increase has been expected for some time meaning that those in the industry and borrowers have had the chance to plan and budget for it.

So this small rise alone should not undermine the mortgage or housing markets.

An interest rate rise is likely to provide a further boost for the specialist market in the medium term. More people will incur minor credit history blemishes as they deal with higher repayments on unsecured debt as well as their mortgages. They will not be in a financial crisis but they will fall into arrears on the odd payment.

As long as these people pass the affordability criteria of lenders there is no reason why they should not be able to borrow money in the future.

Many of them will have experienced life-changing events such as divorce so it’s not simply a matter of bad financial planning. Refinancing could help put them on a more solid footing.

Lenders must be ready to help brokers deal with more sub-prime cases. Overall, the market is in good shape. A small interest rate rise now might well save the need for a larger rise later. Meanwhile, we can look forward to records being broken by the end of 2006, providing some good headlines for the industry.


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