About 700,000 homeowners are facing an increase in mortgage costs when their fixed-rate deals end this year, as a sell-off in the UK government debt market plunges the financial markets into turmoil and threatens to push up household borrowing costs.
Mortgage rates had been predicted to ease this year, as analysts projected multiple cuts to the Bank of England base interest rate, which was expected to feed into the lowering of mortgage rates for homeowners and buyers.
However, the sell-off in government bonds, or gilts, fuelled by concerns over inflation and heavy public borrowing, could keep borrowing costs higher for longer.
As she heads to China for an official visit, Rachel Reeves, the chancellor, is considering imposing steeper cuts to public services to repair the government’s finances after the UK’s long-term borrowing costs rose to the highest level since 1998 this week.
Swap rates, which are tracked by lenders and are the major influence on the pricing of mortgages, have risen sharply.
Two-year sterling interest swap rates, which are a gauge of the average interest rate over 24 months, have risen from just under 4% in mid-September to more than 4.5%.
As it stands, this is likely to mean there will be no relief in mortgage rates in the near future for homeowners and new buyers, and comes on top of an estimated 2.4 million households having to remortgage over the last two years.
Higher interest rates will add £1.27bn to the annual housing costs for property owners remortgaging in 2025, according to research by the property company Savills reported by the Financial Times.
Lucian Cook, the head of residential research at Savills, said the “pressure on household finances” from rising mortgage costs “has the impact of continuing to suck money out of the economy”.
Most homeowners and buyers fix their mortgage rate for two or five years, meaning the big rise in borrowing costs that soared with Liz Truss and Kwasi Kwarteng’s disastrous mini-budget in October 2022 is hitting households over several years.
The Bank has warned that the “full impact of higher interest rates has not yet passed through to all mortgagors”.
The Bank said in November that the typical owner-occupier reaching the end of a fixed rate in the next two years would see their monthly payments increase by 22%, or £146.
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However, the share of households who are behind or heavily burdened by mortgage payments remains low by historical standards.
Investors are worried about government debt, the level of inflation stubbornly failing to fall to the Bank’s 2% target and confidence in the UK economy, with many businesses citing concerns over the impact of Reeves’s October budget, including increasing employers’ national insurance contributions and the minimum wage.
On Thursday, the government said that the bond markets were “orderly” as the sell-off of gilts continued. The Treasury chief secretary, Darren Jones, insisted there was “no need” for an emergency intervention.
Reeves had faced calls to cancel the bridge-building trip to China with a delegation of City amid the market turmoil.
On Friday morning, the yield, or interest rate, on 10-year UK gilts was up two basis points, or 0.02 percentage points, at 4.82%. Long-dated 30-year UK bond yields are almost 2bp higher, at 5.38%. The pound dipped by a third of a cent to $1.227.
