Mortgage borrowers are being urged to secure their next deal sooner rather than later, as turmoil in global bond markets threatens to push up rates.
UK government borrowing costs have risen sharply, caught up in a worldwide sell-off in government debt.
The yield on 10-year UK government bonds, known as gilts, climbed above 5.2% this week, its highest level since 2007, with longer-term government borrowing costs rising even further.
The latest bout of volatility is the result of renewed hostilities between Iran and the US, which have pushed up energy prices and raised fears over inflation.
To add to that pressure, there are increasing concerns in the bond market over how Andy Burnham’s new government will fund its spending plans ahead of the Autumn Budget.
Those concerns have changed expectations for UK interest rates. The financial markets are now pricing in a Bank of England base rate rise by the end of the year and another by March, taking it from 3.75% to 4.25%.
Why gilts matter to mortgages
Fixed mortgage rates are not directly affected by the base rate, as they are based on swap rates, which are influenced by expectations of future movements in interest rates and inflation.
When investors sell government bonds, their price falls and their yield rises. This then feeds into swap rates and ultimately lenders’ funding costs.
In the space of a week, two-year swap rates climbed from around 4.3% to 4.49%, with five-year swaps briefly reaching a three-year high of 4.53%.
Lenders have, so far, not passed on the full increase in wholesale borrowing costs.
Rising mortgage rates
Mortgage rates had been edging lower in recent months as lenders competed for business in a subdued property market, but that process will soon go into reverse if the rise in swap rates continues.
According to Moneyfacts, the average two-year fixed mortgage rate has fallen from a peak of 5.9% at the start of the Gulf conflict to 5.59%, and the average five-year fix has fallen from 5.78% to 5.63%.
Buy-to-let mortgages
Over the same period, the average two-year fixed buy-to-let mortgage rate jumped from 4.66% to 5.44%, with five-year rates rising from 5.05% to 5.75%.
Those rates have also since fallen back, with Moneyfacts reporting an average two-year rate of 4.91% at 60% LTV and 5.27% at 75% LTV at the beginning of August. Any renewed increases would squeeze landlords’ returns and reduce how much they are able to borrow under lenders’ rental affordability tests.
The impact, though, would be felt most keenly by landlords who own properties personally, as mortgage interest only qualifies for basic-rate tax relief.
Locking in rates
There are, however, steps borrowers can take to protect themselves against any rises in mortgage costs.
Most lenders allow borrowers to secure a mortgage up to six months in advance of their existing deal expiring. Locking in a rate doesn’t normally commit them to the deal, and they are often able to switch to a cheaper product if rates fall before completion.
Brokers are therefore advising anyone approaching the end of a deal to act now rather than waiting in the hope that rates will fall further.
