Homeowners have been issued an urgent warning as fixed-rate mortgages are set to rise after Government borrowing costs soared to their highest level in more than 27 years.
The rise in borrowing costs has thrown expected mortgage rate reductions into question, despite previous predictions of multiple Bank of England base rate cuts this year.
The yield on 30-year gilts reached 5.4 per cent yesterday, a level not seen since 1998, while 10-year gilt yields climbed to 4.88 per cent - the highest since the financial crisis.
This has primarily been driven by Labour's Budget plan to increase borrowing and spending, which has caused disruption in Government debt markets, leading to higher interest rate expectations and rising gilt yields.
Additionally, it is affecting Sonia swap rates, which reflect lenders' expectations of future interest rates and are crucial in determining the pricing of fixed-rate mortgages.
The yield on 30-year gilts reached 5.4 per cent yesterday, a level not seen since 1998
GETTY
Five-year swap rates have risen from 3.8 per cent to 4.12 per cent, while two-year swaps have increased to 4.26 per cent from four per cent since early December.
Yesterday alone saw five-year swaps jump by 0.14 percentage points in a single day.
This means that the lowest fixed rate mortgages are currently below their equivalent swaps, something that rarely happens.
The lowest five-year fixed rate mortgage currently pays 4.07 per cent and the lowest two-year fixed rate is 4.16 per cent.
Stuart Cheetham, chief executive of MPowered Mortgages, warned that market uncertainty is driving volatility in swap rates, affecting mortgage rates.
He said: "Although some lenders, including us, have reduced mortgage rates, these reductions are likely to be short-lived."
Paul Dales, chief UK economist at Capital Economics, warned that mortgage rates could climb from around 4.5 per cent in December to just over five per cent in the coming weeks.
Anita Wright, a chartered financial planner at Bolton James, suggested the Bank of England may struggle to cut interest rates further.
She said: "The UK is trapped in a vicious debt circle. The bond market is saying, 'We're pretty certain a second wave of inflation is coming back, similar to the 1970s.'"
Russ Mould, investment director at pensions firm AJ Bell said the markets had cut back on the number of interest rates cuts they expected this year, with most bets by traders suggesting two rather than four.
He said he “wouldn’t be shocked” if the Bank of England decided not to cut rates in February, when the next decision is due.
Some lenders have moved to increase their rates, including Skipton, Virgin and Clydesdale, while TSB has raised more products than it has reduced0.
Major lenders have also announced significant rate changes in recent days, with several cutting their mortgage rates.
- First Direct reduced rates across its mortgage range by up to 0.3 percentage points on Tuesday, offering its lowest five-year fixed rate at 4.13 per cent for buyers with 40 per cent deposits.
- HSBC cut its two-year fixed rates by up to 0.16 per cent and five-year fixed rates by up to 0.15 per cent on Monday, with its lowest five-year deal now at 4.09 per cent for Premier customers.
- Halifax has implemented reductions of up to 0.35 per cent for remortgage customers, offering two-year fixed rates starting at 4.49 per cent for those with a 40 per cent deposit.
- Leeds Building Society joined the trend, reducing its fixed rates by up to 0.24 per cent, with select interest-only rates cut by up to 0.15 per cent.
Accord has increased as many rates as it has cut, reflecting the mixed response to market conditions.
Borrowers facing the end of their fixed-rate deals or looking to buy a home are advised to explore their options promptly.
Homeowners can secure a new mortgage deal six to nine months in advance, often without obligation.
Most mortgage deals allow fees to be added to the loan, though borrowers should consider that paying interest on these fees over the entire term may not be cost-effective.
House buyers should be cautious about overstretching, particularly as higher mortgage rates could impact property prices.
The best approach is to speak with a mortgage broker who can compare costs across different lenders.
Following the surge in borrowing costs the pound tumbled to its lowest level against the US dollar since November 2023, falling nearly one per cent to just under 1.23 US Dollars.
The Treasury has pledged to maintain "an iron grip" on public finances following the debt market sell-off.
Darren Jones, the Treasury chief secretary, told MPs the chancellor would not borrow to pay for day-to-day spending despite rising costs.
He said: "There should be no doubt about the government's commitment to economic stability and sound public finances, this is why meeting the fiscal rules is non-negotiable."
