Mortgage charges to rise as borrowing prices attain highest stage in 27 years

Fixed rate mortgages look set to rise again after the cost of Government borrowing soared to its highest level for more than a quarter of a century.

Rates had been expected to fall this year due to expectations that the Bank of England will cut the base rate three or four times.

But now, rising gilt yields have thrown mortgage rate reductions into question.  

The yield on 30-year gilts hit 5.4 per cent today, the highest it has been since 1998. Meanwhile, the yield on a 10-year gilt went up to 4.88 per cent – the highest level since the financial crisis.

This has been largely triggered by Labour’s Budget plan to borrow and spend more. 

This troubled Government debt markets, sending interest rate expectations and gilt yields higher ever since.

It is also having an impact on Sonia swap rates, which reflect lenders’ expectations of future interest rates and play a critical role in how fixed-rate mortgages are priced.

Swaps have been rising over the past month and fixed rate mortgages, by and large, have yet to follow suit.

As of 6 December, five-year swaps were at 3.8 per cent and two-year swaps were at 4 per cent. 

But as of today five-year swaps have risen to 4.12 per cent and two-year swaps are at 4.26 per cent.

Yesterday alone, five-year swaps jumped 0.14 percentage points in one day.

This means that the lowest fixed rate mortgages are currently below their equivalent swaps – something that is incredibly rare.

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.

Are lenders increasing their mortgage rates? 

The picture among lenders has been mixed in recent weeks, with some increasing rates while others reduce. 

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Swap rates have been mostly trending upwards since mid-December as the outlook suggests fewer rate cuts this year than previously thought. 

‘But despite this a number of lenders including Halifax, HSBC and Leeds Building Society have made significant reductions to their fixed rates as they attempt to build a pipeline of business for the new year.

‘On the other hand, some lenders have moved in the opposite direction and have raised some of their rates, including Skipton, Virgin and Clydesdale, while TSB has increased the pricing of more products than it has reduced, and Accord has increased as many rates as it has cut. 

‘Lenders who are increasing their pricing may be more sensitive to swap rate rises than bigger lenders who have more funds in savings to call upon and are better able to absorb any increases in swaps.’

Anita Wright, a chartered financial planner at Bolton James thinks the current situation could make it extremely hard for the Bank of England to cut interest rates further.

Speaking to the news agency, Newspage she said: ‘The UK is trapped in a vicious debt circle. It is almost impossible to get the deficits down. 

‘The Bank of England clearly hasn’t got inflation under control, minimum wage and national insurance increase are being passed on to consumers in the form of higher prices. 

‘The bond market is saying, “We’re pretty certain a second wave of inflation is coming back, similar to the 1970s”. 

‘Markets now demand higher yields to compensate for inflation risk. The Bank of England is unlikely to be able to cut interest rates in this environment and therefore mortgage rates will at best stay where they are.’

Stuart Cheetham, chief executive of mortgage lender MPowered Mortgages added: ‘Continued market uncertainty is driving volatility in swap rates, which inevitably has a knock-on effect on mortgage rates. 

‘Since the beginning of the year, swap rates have risen and although some lenders, including us, have reduced mortgage rates, these reductions are likely to be short-lived. 

‘Until market confidence improves, swap markets will continue to witness volatility and high mortgage rates are expected to persist.’