Mortgage misery after inflation rise

Homeowners were last night bracing themselves for more misery as figures showed a fresh surge in the cost of living.

Homeowners were last night bracing themselves for more misery as figures showed a fresh surge in the cost of living.

The record inflation data saw the consumer prices index (CPI) hit 3pc in December, up from 2.7pc the previous month.

Yesterday's news came less than a week after the Bank of England sprung a surprise with a quarter-point rise in the base rate as it tried to put the brakes on inflation.

Having been caught out last week, many analysts again had to revise forecasts, with a further rate rise as soon as next month now on the cards.

The plight of homeowners could worsen further, with signals from the property market yesterday suggesting that the days of fixed-rate mortgages were numbered.

The deepening gloom also means bad news for the man set to be the next prime minister, with chancellor Gordon Brown - who will have to pick up the pieces of his own legacy if, as expected, he succeeds Tony Blair in the coming months - presiding over an ever-worsening economic climate.

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The 3pc inflation rate saw Bank of England governor Mervyn King narrowly escape having to write a letter of explanation to Mr Brown, which would have been required if inflation had risen more then 1pc above the target of 2pc.

But that was scant consolation for the governor and the chancellor, with the CPI now higher than its target for eight consecutive months.

The inflation figures gave an insight into why the Bank's monetary policy committee (MPC) put up rates to 5.25pc last week. The MPC had been shown the data before it made that decision.

Just as worrying for the government was yesterday's news that the retail prices index (RPI), which also includes housing, had jumped from 3.9pc to 4.4pc. The RPI is used as the measure for many wage settlements and the increase is likely to put pressure on employers.

Mr Blair played down the long-term significance of the inflation rate, which he blamed on a temporary rise in oil prices. "Inflation has risen in most of the major countries because of rising energy prices - rising oil prices which have doubled, tripled over the last few years," he said. "That, however, is expected to come down in 2007 and we expect to come back to 2pc inflation.

"The underlying position of the British economy, even with the recent interest-rate rise, is one of strong economic growth, historically very low interest rates, inflation under control and employment and living standards high."

Fixed-rate mortgages have traditionally offered home-owners the security of knowing that their repay-ments are guaranteed, regardless of any future change in the base rate. Their withdrawal from the market would see more borrowers on variable rates that go up and down with the base rate - and therefore more people would be at the mercy of the MPC.

More than a dozen lenders, mainly building societies, have withdrawn either selected fixed rates or their entire range of fixed rates since last week, without launching replacement products.

Julia Harris, an analyst at data-provider Moneyfacts, said: "With a further rate rise still on the cards for 2007, those consumers on a tight budget will need to act quickly before more of the current best-buy fixed-rate deals vanish."

Although Portman Building Society yesterday replaced its two-year fixed-rate mortgage offer, its new product is at 5.34pc, which is 0.35 percentage points higher than its previous offering.

Meanwhile, the Ipswich and Yorkshire building societies yesterday joined a number of other lenders in withdrawing their fixed rates without replacing them. And last night it was reported that the Yorkshire had seen so many mortgage applications over the weekend that it had run out of money to lend.

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