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In a widely expected move, the Bank of England has increased interest rates by 0.25% to 5.75%, meaning greater costs for homeowners but good news for savers.
The Bank is now tipped to raise rates to 6% by the end of the year or possibly even earlier.
Inflation and house prices are the main reason rates are on the up, with both being a cause for concern to the Bank's decision makers.
Inflation has been above the target figure of 2% for some months, and while it dropped in June to 2.5%, it is the Bank's main role to bring it down further.
House prices are still increasing in most parts of the country, and in London boom conditions remain, preventing first-time buyers from getting on the ladder and allowing consumers to borrow still more against the value of their homes.
Increased mortgage costs
The rise puts around ¯¿½31 on the monthly interest payments for a ¯¿½150,000 mortgage.
For those with larger loans, it will add an extra ¯¿½42 on a ¯¿½200,000 mortgage and ¯¿½62 a month on a ¯¿½300,000 loan.
Property market experts worried
Commenting on the rise, Ray Boulger, chief economist at mortgage adviser John Charcol, said "(There will) be a considerable negative impact on the housing market over the next couple of years, as the 40% of borrowers, i.e. 4.5m households, with a 2 year fixed rate progressively have to refinance at higher rates."
He advises borrowers that "with the market having fully factored in not only this rise, but also another one to 6%... most fixed rates look expensive compared to discounts and trackers, unless Bank Rate goes beyond 6%."
"Currently, the best two year tracker mortgages are around 0.35% cheaper than the best 2 year fixed rates, even after the effect of today's rise. Thus a fixed rate mortgage will only be cheaper if Bank Rate rises rapidly to at least 6.25% and stays there, or goes higher, for some time."
Stuart Glendinning, MD at moneysupermarket.com, is more pessimistic, saying: "Despite annual inflation being 2.5 per cent, interest only mortgage repayments have increased by almost 28 per cent in the past year, or 11 times the rate of inflation. I fear this latest interest rate rise could well be the straw that breaks the camel's back."
"The 1.25 per cent increase since August will mean annual repayments have increased by ¯¿½1,875 for borrowers on a typical interest only ¯¿½150,000 tracker mortgage. That is a serious amount of money to find."
New Chancellor has mortgage fears
The new Chancellor, Alistair Darling, yesterday expressed his concerns about the thousands of people on fixed-rate two year mortgage deals taken out in 2005 who will soon be paying a huge amount more.
Manufacturers have also called on the Bank to put a freeze on rate rises while previous increases work their way through.
Exports tend to become more expensive to foreign buyers as increasing rates usually mean a stronger pound and sterling is currently at a 26-year high against the dollar.
Most experts are predicting that this isn't the peak in rates and more should be expected going into the Autumn. Some aren't ruling out a borrowing rate of 6.25% by early in the new year.
For savers, it's good news as rates offered by banks and building societies on savings and current accounts may well rise.
