Banking on your home

House prices in Scotland are soaring, with record inflation reaching its highest level in four years. Even tax hikes in the budget are unlikely to choke off the current market's head of steam, Britain's biggest building society predicted on Friday.

Scottish property prices rose by 8.5% between January and March, according to the Nationwide. And pressure on the property market looks set to continue, according to group economist Alex Bannister.

Higher interest rates may be on the horizon, but are not expected to arrive speedily in the wake of the Budget. Nevertheless, Bannister still predicts: "Higher taxes could have some slight dampening impact, but demand is likely to remain strong. We've seen a steady increase in Scottish property prices over the last four years of around 5%, and I think it will end up the same this year."

The Scottish housing market is increasingly mirroring the English one with the recurring pattern of runaway prices in hotspots and more sedate activity elsewhere.

Bannister admits the Scottish mentality is changing. "In the past Scottish home-owners didn't expect to see high increases in their property values and so didn't get caught up in the kind of speculation which happens in England. But that has changed given the double digit inflation in Glasgow, Edinburgh and Dundee." Positive noises from the US corporate sector may have helped provide a short- term boost to the Scottish economy too.

"Still, I don't think that economic conditions are going to improve dramatically in Scotland," Bannister continues, believing the country will lag behind other parts of the UK.

"With that in mind, and the expectation of slightly higher interest rates towards the end of the year, there may be some slowing in the pace of inflation in Scotland, especially if affordability constraints kick in in some cities."

There does seem to be some evidence of affordability problems, particularly in city centres, which are forcing first-time buyers to look even further afield, according to the Halifax. This newish trend is benefiting surrounding commuter areas.

Duncan Movassaghi, regional sales manager for Scotland, at the Halifax, reports: "In Glasgow there are a set of extremes in terms of prices and demand, with Bearsden and Milngavie at the high end and areas such as Campbeltown at the lower end."

He explains that Edinburgh has experienced high property prices which have mirrored the city's recent economic growth.

Elsewhere though, quality properties are selling extremely well in Perth and supply continues to be a problem in Dundee, where demand is also strong.

According to the Halifax, the average price of a house in Scotland is now (pounds) 64,204. Better news is the fact that the average Scottish homebuyer now spend around 14% of their annual income on mortgage payments compared to a peak of 27% in 1990, which could leave scope for further price increases. This leaves prospective house-buyers facing the other looming problem. Most experts agree that interest rates will rise before the end of the year, despite the Bank Of England's decision last week to keep them on hold for the fifth successive month.

HSBC bank believes that underlying borrowing rates will reach 4.75% by the end of the year, up 0.75 basis points from their current level of 4%. Furthermore, its experts predict borrowing costs could hit 5.5% by the end of 2003. The knock-on effect will be that mortgage rates will rise, probably by between 1.5% and 2%, which could create problems of affordability for many young home-owners.

Does that mean house-buyers should hurry to buy a property? No, buying in haste could well lead to problems. Bearing in mind the expectation of higher interest rates, it's important to consider the impact on monthly mortgage repayments.

In other words, if you think you can afford a hefty mortgage now, could you still afford it if rates rose by 2%, which could actually swell monthly payments by nearly half on some deals? If you're feeling nervous and can't afford rate hikes, the answer may be to fix, and this may be a particularly good idea for those tempted to remortgage.

In the meantime, lenders have begun pulling their best fixed rate deals and replacing them with less generous offers in the last few weeks in anticipation of the wave of higher interest rates.

This means that you've missed out on Nationwide's two-year fixed rate of 5.09%, withdrawn at the end of March and replaced with a new rate of 5.29%. You've also missed out on Cheltenham and Gloucester's five-year fix at 5.59%, which was replaced at the same time with another new rate of 5.89%.

However, don't be panicked into getting a fix just because the best deals are disappearing. Bear in mind that Nationwide's standard rate is only 4.74% at present. It means that if you go for a fixed deal, you are gambling on interest rates rising.

Don't forget that fixed deals tend to rise and fall ahead of the market, because they are based on future movements in borrowing costs. Some experts believe the money markets are currently overdoing the gloom about possible rate rises.

That said, with so much burbling uncertainty on the international front, security may well be of value if you are opting for a very large loan. At least you can sleep at night regardless of sudden shocks on the global economic and political stage.

An alternative is to seek out a discount. Alliance & Leicester, for instance, currently offers a 2.06% discount for three years. Its standard rate is 5.95% which the discount slices to 3.89%.

This may seem a better prospect than a fix, if rates remain relatively stable, but could prove a painful choice if the rate pessimists win the day. In other words, if you opt to take a discount, you're gambling that if rates do climb, they only increase by a little so that you still beat the fixed offers. Which way you finally bet will ultimately depend on how badly you can't afford to lose.

If you really want to play safe, you can always opt for half and half, which is what Kari Ruuskanen decided when he bought his new home in Trinity, Edinburgh, with a loan from Standard Life Bank. He fixed 60% of his loan at 5.69% and took a discount on the remaining 40% of it at the lower rate of 5%.

He said: "With two small children, we wanted to move to a house with a garden. I wanted the security of the fix, but I also wanted the flexibility of being able to pay some off early if I wanted to. This gives me the best of both worlds."

With the bewildering variety of deals out there, you have to payparticular attention to penalty clauses, specifically the redemption periods. These are the length of time that you must stay with the lender's deal. If you try and switch to a better deal during the redemption period, you are likely to be charged up to six months' interest.

Another important thing to bear in mind when taking out a mortgage is the cost of household insurance. In the last six months since the terrorist attack on the US last September, insurers have been warning of premium increases.

Their excuse is that they need to recoup the costs of the Twin Towers collapse, but they have been looking to up premiums for a while now.

Look at the way they leapt on the widespread floods across the UK last year as another reason to increase the cost of cover.

The good news is you don't have to take it lying down. For starters, it's probably not wise to take the insurance offered by your lender. It's far better to shop around instead and go for the most competitive quote.

These days it's simple to compare quotes from different insurers on the phone or the internet. There are a huge range of specialist brokers and insurers on the web. Check out the financial information net directory www.find.co.uk for links to outfits offering insurance deals online.

Buying a house is the biggest investment most people will ever make, so choosing a mortgage should not be done lightly. Simon Read weighs up some of the products on the market

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