Households are facing a further financial squeeze as borrowing costs lead to lenders upping rates
Mortgage rates are expected to rise due to the worsening economy, experts have warned, causing a “significant challenge” for Rachel Reeves.
Average two-year and five-year fixed deals for those with 25 per cent equity or deposit are now expected to rise above 5 per cent in the coming weeks, causing more financial pain for buyers and those trying to re-mortgage.
And while it was previously predicted the base interest rate set by the Bank of England could be cut four times in 2025, financial markets now expect there to be only two decreases this year.
The gloomy picture leaves thousands of households facing a further financial squeeze, increasing the pressure on the Chancellor over the cost of living.
Reeves is poised to deliver a mini-Budget in spring for which she will be under pressure to announce further public spending cuts and higher taxes to try and stabilise public finances.
But property experts and mortgage brokers tole The i Paper the high government borrowing figures which are causing a headache in the Treasury will increase mortgage costs.
Many point to the decisions taken in the Autumn Budget to increase the tax burden on businesses as a factor in squeezing growth and increasing the cost of borrowing.
Several smaller lenders have already put up prices after 10-year UK gilts – which reflect the cost of government borrowing – climbed to their highest point since the 2008 financial crisis.
Aaron Strutt of brokers Trinity Financial said: “It seems likely there are mortgage price hikes on their way. With all of the uncertainty in the economy and pretty harsh tax changes announced in the Budget, mortgage borrowers are set to end up paying more and for longer.
“In the short term, it looks likely rates are going to be higher than they were pre-Budget.”
Rates are due to be impacted by rising swap rates – a financial term used to describe when two parties such as banks exchange (or swap) interest rates to secure funding over a set period of time.
Swap rates directly influence the price of fixed-rate mortgage deals, and are increased by increases in the cost of government borrowing.
Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “If government borrowing stays high and swaps continue to rise, then lenders may have to increase their mortgage rates. It’s a headache Rachel Reeves could well do without.”
National finances could come under even greater strain as a result of US pressure to increase defence spending, with Donald Trump saying Nato members should raise their military expenditure to 5 per cent of GDP.
Nick Mendes, broker at John Charcol, said: “While most lenders haven’t yet raised their rates significantly of the back of recent increases in swap rates, there’s no denying the pressure they’re under to do so. Lenders are currently holding back, perhaps to avoid unsettling the market, but this can only last for so long.
“This could pose a significant challenge for Rachel Reeves. High borrowing costs aren’t just a numbers game – they’re a reflection of wider economic issues that could make it harder for Labour to present itself as a safe pair of hands.”
Coventry Building Society has already announced it will be increasing all standard fixed rates as of Monday (13 January) while Skipton, Leeds Building Society TSB and Virgin have also announced hikes in recent days.
Property expert Jonathan Rolande warned that even if the base rate does decrease from its current level of 4.75 per cent, mortgage rates could still rise.
“If international rates rise further we shall see the cost of fixed rates rise, even if the Bank maintains rates or even trims them.
“The bigger issue for Reeves is how to balance the books if the situation continues. Without growth, this means cuts to public spending or an increase in taxes.”
The rise could also have an impact on housing activity.
Ashley Webb, UK economist at Capital Economics, said: “The recent surge in gilt yields suggests both two-year and five-year fixed mortgage rates – for those with 25 per cent deposit or equity – will rise above 5 per cent in the coming weeks.
“This probably won’t prevent a temporary boost to housing demand and prices in the first quarter of this year as buyers rush to complete deals before the expiry of the increase to the nil rate stamp duty thresholds on 31 March. But it may mean housing activity is a bit softer than we expect later in the year.”
However, other experts suggested the uptick is not comparable to when rates soared following Liz Truss’s mini-Budget, especially as some lenders, including HSBC are still reducing rates.
David Hollingworth of L&C Mortgages said: “The reaction in the markets is nothing like the huge spike that we saw after the mini-Budget, so this isn’t a flashback to that time when fixed rates rocketed.
“If the market perception that interest rates won’t come down as quickly or as far worsens it looks like fixed rates will remain pretty static or potentially increase. Of course, it can shift the other way as well and last year saw fixed rates move up and down through the year.”
Borrowers are advised not to panic and to take advice from a broker. Rates can be booked several months before required, so if rates have fallen by the time you come to take out the mortgage, you should be able to switch to a lower rate then.
Currently, the average two-year fixed mortgage rate on all deals is 5.47 per cent, while the average five-year is 5.25 per cent, according to Moneyfacts.
Why mortgage rates are due to go up and what the best deals are
Mortgage rates are expected to increase as a result of higher borrowing costs and increasing swap rates.
A sharp rise in gilt yields often signals concerns about inflation, government borrowing levels, or monetary policy. These concerns are quickly reflected in swap rates – which are based on expectations for where the base rate will go in the future.
This ultimately influences the cost of borrowing for households.
The best deals
Currently, the best two-year fixed deal for people with 40 per cent deposit or equity in their home is with Leeds Building Society at a rate of 4.15 per cent with a £1,499 product fee.
For those with a lower deposit of 10 per cent, this rises to 4.94 per cent with Virgin. It is charging a fee of £995.
NatWest is the best rate for people looking for a five-year fix at 4.07 per cent for those with a 40 per cent deposit or equity with a £995 fee.
Nationwide offers the best rate for people with a 10 per cent deposit at 4.64 per cent and a £999 fee.
People looking to buy or re-mortgage are encouraged to check with a broker to see if they can lock in a rate ahead of purchase. Most will let you do so six months ahead. If a better rate comes up in that time, you can switch.