The Bank of England’s fourth rate rise since August could not have come at a worse time for hard-pressed borrowers.

The cost of living is rising at 4.8 per cent a year on the retail prices index (RPI), its highest rate since 1991, and middle-class families are being squeezed even harder with a typical inflation rate of 6 per cent.

It is not only mortgage costs that are rising; school fees, council tax, furniture and food are all going up more than the average.

However, borrowers could cut their repayments by hundreds of pounds a year with a few simple steps. An astonishing 2m people are still paying their lender’s standard variable rate (SVR), typically 7.5 per cent, when they could get a deal as low as 5 per cent.

We offer advice for borrowers concerned about rising mortgage payments, first-time buyers struggling to get on to the housing ladder and savers, many of whom are being short-changed by banks or building societies.

Borrowers

1Remortgage without delay

Around 900,000 borrowers will come to the end of two or three-year fixed-rate mortgage deals this year. To date they have been protected from recent interest rate rises but face a huge leap in monthly payments unless they remortgage to a new product.

Most loans switch to the lender’s SVR once the fixed-rate period comes to an end. Following last week’s quarter-point increase in Bank rate, the typical SVR is likely to rise to 7.5 per cent.

Someone who took out Newcastle’s two-year fix at 4.49 per cent in May 2005 on a £150,000 interest only loan will see monthly payments leap by nearly £390 from £561 to £949. This assumes Newcastle’s SVR, currently 7.34 per cent, rises by the full quarter point.

David Hollingworth at L&C Mortgages, a broker, said: “Those who are coming to the end of a fixed-rate mortgage deal need to take action to minimise the payment shock.”

Bank rate is 0.75 points higher than it was this time two years ago, so anyone looking to remortgage will probably have to pay a slightly higher rate. Halifax and Abbey have the best remortgage deals for two-year fixed rates at 5.34 per cent. These products are only available through brokers with a £999 arrangement fee, but the valuation and legal work are free.

It is not only those coming to the end of fixed-rate mortgages who should consider remortgaging. If you are nearing the end of a discount or tracker deal, or if you are already paying SVR, you should also look to switch.

2 Don’t fix automatically

Borrowers with a £150,000 inter-est-only loan have already seen their monthly mortgage costs rise from £564 to £656. Following the latest increase, their monthly payments will go up to £687 – probably from next month. And if rates go up again, they could hit £719 or even £750 a month. This would mean an additional £2,256 a year.

One in seven people will struggle to pay their mortgage now Bank rate has gone up to 5.5 per cent according to Mform, a mortgage comparison site. This will worsen with further rises. Anyone who would struggle with further hikes should look to lock in to a fixed rate.

However, if you are not struggling, now may not be the best time to fix. The money markets, where lenders fund fixed rates, have already priced in two more rate rises so fixed deals are likely to be at a peak and discounts and trackers are looking good value.

Newcastle has a two-year discount at 4.65 per cent – the building society has yet to respond to Thursday’s rate rise, so this rate is likely to go up to 4.9 per cent. With one more rise in Bank rate, Newcastle’s deal would go up to 5.15 per cent – which is slightly higher than the society’s two-year fix at 5.07 per cent. But if you go for the discount your payments will drop if rates are cut next year, as many economists expect.

Melanie Bien at Savills Private Finance, a broker, said: “We appear to be nearing the top of the interest-rate cycle and rates could well begin to fall back next year. If you are on a variable rate, you will benefit if this happens.”

3 Cut payments

Most mortgage deals are flexible and allow you to make overpayments, underpayments or take payment holidays. If the latest rate hike causes difficulty, tell your lender you want to make underpayments or ask it not to increase your direct debit.

Ray Boulger at John Charcol, another broker, said: “Payment holidays and underpayments can be a useful in the short term, if money is tight, but you need to remember that the money does have to be repaid eventually.”

If you can afford to spare slightly more each month, you could overpay.

Many lenders allow borrowers to overpay by up to 10 per cent a year without penalty. This not only helps to pay off the mortgage more quickly, but if you find yourself stretched in the future, you can afford to underpay or take payment holidays.

4 Offset savings Offset mortages help negate the impact of interest rate rises. They work by setting your savings against your borrowings. Rather than earning interest on your savings, the money in effect cuts the size of your overall mortgage, so you pay less interest.

If you had a £150,000 mortgage and £50,000 in savings, you would pay interest on only £100,000 of the loan.

Most offset lenders base monthly payments on the full loan amount, £150,000 in this case, so you overpay each month. They are flexible, so you can underpay and take payment holidays.

However, some offset providers, including Intelligent Finance (IF) and Woolwich, let you recalculate your monthly repayments so they reflect the amount you have in savings.

Using the above example, you would pay £599 a month if the payments were based on £100,000, compared with £898 on a £150,000 loan. This assumes a 25-year repayment mortgage and a rate of 5.24 per cent.

Offsets also offer a big tax advantage, which makes them attractive to savers as well as borrowers. Because you do not earn any interest on your savings, you pay no income tax on them.

The RPI is currently 4.8 per cent. Higher-rate taxpayers need to earn at least 8 per cent on their savings in order to make a positive return after tax and inflation. Yet the best paying easy access savings account from ICICI bank has a rate of only 6.05 per cent. However, IF has a two-year tracker available through brokers including John Charcol and Savills, with a rate of 5.24 per cent, which is equivalent to a savings rate of 8.73 per cent for those in the higher-rate tax band.

First-time buyers

5 Try to put down a deposit

Lenders including Alliance & Leicester, Scottish Widows, Coventry building society, Northern Rock and BM Solutions will advance mortgages in excess of a property’s value.

Bank of Scotland and Royal Bank of Scotland will lend up to 100 per cent. However, advisers recommend you try to put down a deposit if possible.

Not only will you get a better mortgage rate and have a wider choice of lenders, but you also have an equity buffer in case house prices fall.

Borrowing more than your home is worth puts you in effect into negative equity – when the debt is more than the property’s value. In recent years this has not been a problem as house prices have been rising.

However, the recent increases in interest rates will feed through to prices and many economists expect the rate of growth to slow from 10.9 per cent, where it stands, to about 5 per cent by the end of the year.

Most housing analysts expect to see low single-digit growth over the next few years and some think the market could stagnate and that prices may even fall in some areas. Anyone borrowing 100 per cent or more now is at greater risk of negative equity if they have to sell within a few years.

6 Go cap in hand to your parents

It is very difficult to get a mortgage without help. The average house price is £196,745, according to Halifax and many first-time buyers are unable to raise a large enough mortgage on their salary alone – lenders will typically advance around four times single income, so the maximum someone earning £25,000 a year could expect to borrow is about £100,000.

Many lenders accept parents as guarantors, though, which may enable the child to borrow more than they would on their own, as the mortgage is based on a parent’s salary. Most require the parent’s income to cover the child’s mortgage as well as their own.

However, some offer guarantor schemes with less stringent requirements. Bank of Ireland offers a scheme called First Start. It will lend four times the parent’s income, once his or her annual mortgage payments have been deducted, plus one times the child’s.

If the parent’s annual income is £50,000 after they have paid their mortgage, and the child earns £25,000, they could borrow up to £225,000.

Scottish Widows also accepts guarantors and only requires the parent’s income to cover the shortfall. So, if the child needed £150,000 but could only borrow £100,000 on his or her salary, the parent’s income would need to cover just £50,000

You could also consider buying with someone else. With further interest rate rises a possibility, it is essential not to overcommit to something you cannot really afford.

Lenders treat friends or sib-lings buying together in the same way they treat couples, so getting a mortgage is not a problem. Many will lend about 3.5 times joint salary and most allow up to four names on a mortgage.

Another option is to get a lodger. However, most lenders will not take expected rental income into account when calculating how much you can borrow.

7 Go interest only

Taking an interest-only rather than a repayment loan helps keep the monthly cost down. Someone with a £150,000 mortgage at a rate of 5.5 per cent would pay £921 a month on a repayment basis, compared with £687 interest-only.

The reason why payments are so much lower is that you are not repaying the capital. If you go interest-only you will have to repay the capital borrowed in full at the end of the term.

Unless you put money away into a savings vehicle each month to cover this, advisers recommend that you transfer on to a repayment loan as soon as you can afford to. Alternatively, you should look to make regular or lump sum overpayments to start paying down the capital.

Savers

8 Check your savings rate

A handful of savings providers, including Cahoot, Icesave, ICICI Bank and Heritable Bank have already announced increases to their savings rates, but most institutions are still “reviewing” them and are not likely to announce changes until the end of the month.

Savers need to keep an eye on their rate and advisers believe most people should move their savings to a different account – 84 per cent of savings accounts pay less than Bank rate according to Moneyfacts, a comparison site.

Among the top deals, ICICI Bank has increased the rate on its Hisave account from 5.65 per cent to 6.05 per cent. Icesave and Heritable Bank have passed on the full quarter-point rise on their easy-access accounts. They will pay 5.95 per cent and 5.81 per cent respectively from May 18. Anglo-Irish Bank’s easy-access account is paying 5.65 per cent and the bank has yet to respond to the rate rise, so this should go up.

9 Fixed-rate bonds

Some economists think the Bank of England may increase interest rate again.

However, this has already been priced into money-market rates, which determine the price banks and building societies pay on their fixed bonds. It could therefore be an ideal time to fix your savings.

You should only consider a fixed-rate bond if you can afford to lock money away because you cannot normally access your savings during the fixed term. Also advisers tend to recommend fixing for no longer than three years, just in case interest rates rise by more than expected, leaving you tied into an uncompetitive deal.

The best rate currently available is 6.26 per cent from Halifax. This is a one-year bond and the minimum investment is £500.

Stroud & Swindon building society is paying 6.25 per cent – this is only available online and the rate is fixed until June 3, 2008. The minimum deposit is higher at £5,000.

10 Use your cash Isa allowance

If you do not plan to use your Isa allowance to invest in shares this year, then take out a cash Isa. You can invest up to £3,000 and the interest is tax-free.

Egg is offering the highest variable rate at 6.05 per cent and the bank has yet to respond to last week’s interest rate change so this should increase. National Savings & Investments is also paying 6.05 per cent, but this is a new rate that factors in the latest Bank rate increase.

Neither of these accounts accept transfers, however, so if you are looking to move Isa money you have invested in previous tax years, Kent Reliance is the best option. It pays 5.71 per cent, but again, the building society has not reacted to the rate change.

If you are happy to fix your Isa rate, Bradford & Bingley has a deal paying 6.15 per cent for a year. You have to invest the full £3,000 allowance, however.

Cheap fix was the cat's whiskers for Chris

Chris Tennant, a 32-year-old recruitment consultant from Twyford in Berkshire, recently remortgaged on to a two-year fixed rate with Abbey.

The deal, which is no longer available, is fixed at 5.09 per cent. There was a £999 arrangement fee, although Tennent received a free valuation and legal work because he was remortgaging.

Tennant, who lives with his fiancee, said: ‘I think the interest-rate volatility could continue for the next few years, so we decided to go for a fixed rate to protect ourselves from further rises.

‘We plan to make overpayments if we can but didn’t want to have to worry about having to pay more as a result of interest-rate increases.’

Chef's tutor cooks up a better rate

Sarah Kearns, 51, is a freelance tutor for chefs and cooks. She lives in Lymm, Cheshire. She recently moved her savings from ING Direct to Birmingham Midshires.

Birmingham Midshires has yet to respond to Thursday’s interest-rate rise, but the Direct Telephone account Sarah invests in is paying 5.5 per cent and this should increase.

She said: ‘My income is variable so I need to get a good rate on my savings account and I lost faith in ING. I opened that account in 2003 when it was offering a market-leading rate. But it has become less competitive over time, and when I didn’t see any benefit from the past few rate rises I decided enough was enough and that I should move to a higher paying account.’