Rising rates needn't be too painful; FINANCIAL MAIL.

Byline: HELEN LOVELESS

INTEREST rates are on the rise. Ten days ago, the Bank Rate rose to five per cent, the highest level since the aftermath of September 11. But there could be worse to come. Experts are predicting a rise to 5.25 per cent early next year. While it is good news for savers, it is less welcome for many borrowers whose payments could rise steeply. HELEN LOVELESS assesses the best strategies to adopt for savers and borrowers.

MORTGAGES OPTION 1: FIX

BORROWERS can protect against further Bank Rate rises by taking out a fixed-rate mortgage. By doing this, they guarantee that monthly loan payments will remain the same, irrespective of dearer borrowing.

The risk, of course, is that borrowers could end up paying over the odds if rates fall unexpectedly.

Over the past three months, fixedrate deals have become more expensive, but it is still possible to find rates under five per cent.

Natasha and Richard Fetherston have just sought the safety of a fixedrate loan. They have remortgaged their three-bedroom Edwardian home in Brentwood, Essex, taking out a twoyear 4.85 per cent fixed-rate deal with Cheltenham & Gloucester.

Natasha, 30, an account manager for a lingerie firm, says: 'We need the security of knowing what our monthly payments will be.' OPTION 2: SEEK OUT A DISCOUNT DISCOUNTED mortgages offer borrowers a rate linked to the lender's standard variable rate (SVR). These can appear attractive. But David Hollingworth of mortgage adviser London & Country in Bath, Somerset, warns that borrowers taking out such discounted deals leave themselves vulnerable, not only to further rate rises but to the whim of lenders.

'If rates go up by a quarter of a percentage point, most lenders will pass on the increase, but some may also choose to increase their profit margins by putting up their SVR by more than a quarter point.' OPTION 3: CONSIDER A TRACKER THERE are some competitive tracker loans available, which follow the Bank Rate. For example, nationwide mortgage advice firm Charcol is offering a tracker from Darlington Building Society at 0.01 of a percentage point below Bank Rate until 2012, giving a rate of 4.99 per cent. There is a [pounds sterling]499 arrangement fee and borrowers can make unlimited overpayments without penalty. But the main attraction of this deal is its 'droplock' option, which allows borrowers to switch to one of Darlington's range of fixed-rate mortgages if rates look likely to go up.

Woolwich, part of Barclays, has a lifetime tracker. The rate is charged at Bank Rate plus 0.17 of a percentage point for the life of the deal and there is a [pounds sterling]795 arrangement fee.

SAVINGS

OPTION 1: ISAs THE rise in rates is good news for savers who have not already used up their annual mini-cash Isa allowance of [pounds sterling]3,000. Rates on most cash Isas are more competitive than many deposit accounts and savers benefit from earning tax-free interest.

OPTION 2: INSTANT ACCESS WITH RATE GUARANTEES A NUMBER of companies are promising returns a quarter-point above Bank Rate for the foreseeable future.

Indian internet bank Icici's hi-save account, for example, pays 5.45 per cent and guarantees to keep the rate at least a quarter point above Bank Rate until the end of next year.

OPTION 3: FIXED-RATE BONDS PAUL Ilott of Bates Investment Services in Leeds says savers should be wary of fixed-rate bonds. This is because the rates could become uncompetitive if there are further Bank Rate rises. If a fixed-rate savings deal is a must, Ilott says savers should opt for a shorter-term deal. For example, Coventry Building Society pays 5.8 per cent fixed on balances over [pounds sterling]1,000 into its bond, which matures at the end of January 2008.

Even plastic is getting more expensive

THE good news is that credit card borrowing rates are not usually affected by increases in the Bank Rate. The bad news is that many leading card providers have put up rates by up to six per cent in the past three months in response to the Office of Fair Trading's call for default and penalty charges to be reduced to a maximum [pounds sterling]12. And further rises cannot be ruled out. Card borrowers who cannot escape from the consequences of higher rates are those with Bank Rate tracker plastic - Coop (Platinum Bank Rate tracker), Northern Rock and Yorkshire building society offer such cards. Michelle Slade, left, of financial information provider Moneyfacts says that credit card borrowers must be on their guard against the rising cost of using plastic.

Some card issuers such as Coop have now introduced monthly fees, while others are planning to reintroduce annual fees.