UK Homeowners Face Mortgage Rate Hikes Amid Global Bond Market Turmoil

Homeowners in the UK are braced for a jump in mortgage rates, driven by higher inflation and interest rate increase expectations amid turmoil in the global bond markets.

UK swap rates, which lenders use to price mortgages, have risen to a three-year high, as this week’s global bond market sell-off ripples through the economy.

The five-year swaps rate rose above 4.52% on Wednesday, the highest level since October 2023. This is expected to result in higher interest rates on fixed-term mortgages.

A jump in oil prices, as the US and Iran have exchanged fire this week for the first time in a month, has led to fears of higher inflation, leading investors to sell bonds, which pushes up their yield, or interest rate. The moves in gilts, as UK government bonds are known as, have been bigger than those in other countries.

Although the turmoil in the bond markets eased on Thursday, the consequences of the jump in bond yields could be serious for borrowers.

That is because UK swap rates – the interest rates that banks charge when they borrow from each other – have been pushed up by the rise in gilt yields.

Russ Mould, the investment director at the trading platform AJ Bell, said: “Credit card, mortgage and auto loan interest rates will rise if bond yields rise, as the lenders seek to preserve loan book margins and manage their risk.”

If the cost of government borrowing continues to remain high, it could undermine Andy Burnham’s efforts to ease cost of living pressures.

The new prime minister attempted to calm volatile bond markets on Wednesday, using his first appearance at prime minister’s questions to promise decisions for the autumn budget would be “grounded in fiscal responsibility”.

He spoke as the yield on UK 10-year government debt hit its highest level since 2008 for a second day, before retreating thanks to a drop in the oil price. On Thursday, Brent crude, the global oil benchmark, dipped 0.6% to $95 a barrel.

Oil has been one of the key factors driving the bond market sell-off, as inflationary pressures from high prices could force central banks to raise interest rates, along with worries over high government spending. Government bonds are also competing with a flurry of corporate debt issuance by technology companies keen to fund their spending on AI infrastructure.

Tom Simpson, the managing director of homes at Yorkshire Building Society, said swap rates were now 0.7% above where they were a year ago, but there was “much more volatility” in March, at the start of the Iran war.

“All things being equal, you would expect a modest increase in mortgage rates based on what we’ve seen so far,” he told the BBC, advising people who were worried about this to speak to an independent mortgage adviser.

“When there is a movement in the market, that can pull forward demand. People will try to lock those rates in.” However, he added that the 0.1 percentage point increase over the past week was below the 0.5 percentage point increase in the 10 days after the US and Israel first launched airstrikes on Tehran.

Fixed-year mortgage rates were unchanged on Thursday, according to the latest figures from Moneyfacts. The average two-year fix is 5.59%, while a typical five-year fixed deal costs 5.63%.