Government borrowing costs have hit a 28-year high amid question marks over Keir Starmer’s future – but the impact could be felt on mortgages, pensions and savings too
The political turmoil surrounding PM Keir Starmer’s future risks driving up mortgage costs, experts have warned.
The drama – with Sir Keir vowing to fight on despite mounting calls for him to go – has spooked financial markets. One impact has been on the bond market, on which the government relies for borrowing.
The yield – or rate – on benchmark 10-year gilts surged 0.10% to 5.10%, just below the highest levels since 2008 it hit in March on concerns around the inflationary impact of the Iran war. The longer term 30-year yield, which is sensitive to fiscal concerns, was up at 5.81% at one stage, the highest since 1998, before easing slightly.
READ MORE: Starmer ally sits on the fence during awkward live TV interview over PM’s futureREAD MORE: Experts warn PM change could push up UK government borrowing costs even higher
The big question is what happens next, with consequences for not just the public finances but those of millions of ordinary borrowers and savers.
Neil Wilson, investor strategist at investment platform Saxo UK, warned: “We could see a blowout in longer-dated gilts if this turns into a dogfight. Markets tend to dislike a lack of certainty over who runs a government. It is not good for the government and it is not good for mortgages as well.” Economist Mohit Kumar, from investment bank Jefferies, said: “A managed exit would be our base case scenario. Any replacement would likely be left leaning.”
The jump in gilt yields isn’t anything like the 0.30% jump in the wake of failed Tory PM Liz Truss’s mini budget of 2022, which sent mortgage costs soaring, but came from a lower starting point. UK borrowing costs remain the highest among the group of seven advanced economies and have risen the most since the Iran war, so a further rise will add to the pressure on its public finances.
“The bond market is reacting not only to Starmer’s potential departure, but also to who his successor could be, and to the prospect of a drawn-out leadership battle that leads to more fiscal promises that the UK cannot afford,” said Kathleen Brooks, research director at broker XTB.
One other implication is for the cost of new fixed rate mortgages, which have only just begun to ease after an spike caused by US President Donald Trump and Israel’s war with Iran. Fixed rate home loans and based on what are called swap rates, or how much banks charge to loan to one another. Those swap rates are influenced by gilt yields and future expectations for the Bank of England’s base rate. The political upheaval makes it even more likely that rates will say higher for longer.
Maike Currie, vice president of personal finance at PensionBee, said: “Political instability matters because uncertainty can quickly filter through to pensions, mortgages and household finances. The 2022 mini-Budget demonstrated how fast turmoil in gilt markets can spill into retirement savings and pension stability.
“Many defined contribution pension funds increase exposure to bonds and gilts as savers approach retirement, leaving pension values sensitive to inflation expectations, interest rates and market confidence.
“Bond markets might seem distant from everyday life, but their impact is immediate and far-reaching. Gilt yields have been climbing on the back of rising oil prices and concerns over government credibility, with 30-year gilt yields recently reaching their highest level in almost three decades.
“Higher gilt yields feed directly into mortgage pricing and borrowing costs. For the estimated 1.8 million households due to remortgage this year, renewed volatility risks keeping mortgage rates higher for longer. One silver lining is that higher gilt yields improve annuity rates, allowing those converting pension savings into guaranteed income to secure stronger retirement incomes than they could just a few years ago.”
Shares in banks took a hit amid speculation a surcharge will rise to 5% from 3% as a leftward shift in policy is more likely.
Bond markets were also under pressure across Europe as hopes for a peace deal on Iran faded as President Trump said a ceasefire was on “life support”.
Chris Beauchamp, chief market analyst at investing and trading platform IG, said: “There has already been something of an impact in that the FTSE 100 is underperforming other indices today and the FTSE 250 is really hit hard – the turmoil pushes yields higher and raises the risk of weaker economic growth, hurting earnings and savings.
“Higher borrowing costs and a weaker pound is a deadly combination – slower growth and higher inflation will directly hit company earnings, and send shares lower, hurting pensions. International investors could stay away too, hitting the vital flows needed to help stock markets move higher – this is partly why the FTSE 350 did so poorly post-2016, and we risk another few years of ‘lost’ returns if political instability makes a real comeback.”