Mortgage rates to rise on back of bond market turmoil
Mortgage rates will rise higher in the coming weeks as lenders respond to the recent turmoil in the bond market, according to experts.
Gilt yields, which reflect the cost of government borrowing, have marched higher, reflecting both global bets on higher interest rates and concerns about the Chancellor’s fiscal plans.
Earlier this week, the yield on the 30-year gilt hit its highest level since 1998, while the 10-year gilt rose to its highest level since 2008.
“The rise in gilt yields always raises the spectre of rising fixed mortgage rates, because they’re very responsive to changes in interest rate expectations,” Sarah Coles, head of personal finance at Hargreaves Lansdown said.
Gilt yields influence the mortgage market through swap rates, the main benchmark for mortgage lending in the UK.
Swap rates effectively represent the market’s best bet about the future direction of interest rates. When gilt yields rise, swap rates tend to rise too which increases the cost of funding for mortgage lenders, putting pressure on them to increase rates.
Swap rates have increased in recent days, but so far the response in the mortgage market has been limited. According to Moneyfacts, the average rate on a two-year fix stood at 5.47 per cent on Friday, unchanged from Monday.
The average five-year fix, meanwhile, was 5.25 per cent, up from 5.24 per cent at the start of the week.
Simon Gammon, managing partner at Knight Frank Finance, said: “Swaps have moved materially so pricing pressure is already there for all lenders . . . if the current trend continues with swaps remaining high, we will probably see mortgage rates move higher across the board.”
Paul Dales, chief UK economist at Capital Economics, added that rates would “rebound” in the coming weeks on the back of higher gilt yields.
Despite the anticipated increase, Coles said “there’s no need for prospective borrowers to panic at this stage”.
“There are no guarantees, but the strength of the immediate reaction means there’s room for the markets to gain a bit of perspective. If that happens, we’ll see yields drop again, and mortgage rates could ease,” she said.