Scalable video coding (SVC) is currently developed as an extension of H.264/AVC. In the SVC encoder, an exhaustive search technique is employed to select the best coding mode for each macro block (MB). This technique achieves an optimal trade-off between rate and distortion, but it requires an extremely large encoding time. In this paper, we propose a fast mode decision algorithm for inter-layer coding at the enhancement layer. The proposed algorithm predicts the mode of each MB at the enhancement layer using the modes of a co-located MB and its neighboring MBs at the base layer. The proposed method can achieve a time saving of up to 74% in spatial scalability and 63% in coarse grain quality scalability with negligible loss of quality and bit rate increment.