Almost 700,000 homeowners are facing an increase in mortgage costs when their fixed-rate deals end this year, as a sell-off in the UK government debt market threatens to push up household borrowing costs.
Mortgage rates had been predicted to ease this year, as analysts projected multiple cuts to the Bank of England base interest rate, which was expected to feed into the lowering of mortgage rates for homeowners and buyers.
However, the sell-off in government bonds, or gilts, fuelled by concerns over inflation and heavy public borrowing, could keep borrowing costs higher for longer.
As the chancellor, Rachel Reeves, heads to China for an official visit, she is considering imposing steeper cuts to public services to repair the government’s finances after the UK’s long-term borrowing costs rose to the highest level since 1998 this week.
The culture secretary, Lisa Nandy, defended Reeves’s decision to make the trip to China despite the market turmoil. “From my point of view, and I think many others’, it is absolutely right and proper that the chancellor is taking seriously our relationship with the world’s second largest economy and is in China this weekend,” she told the BBC on Friday.
Swap rates, which are tracked by lenders and are the major influence on the pricing of mortgages, have risen sharply. Two-year sterling interest swap rates, which are a gauge of the average interest rate over 24 months, have risen from just under 4% in mid-September to more than 4.5%.
As it stands, this is likely to mean there will be no relief in mortgage rates in the near future for homeowners and new buyers, and comes on top of an estimated 2.2 million households having to remortgage over the last two years.
Most homeowners and buyers fix their mortgage rate for two or five years, meaning the big rise in borrowing costs that began with Liz Truss and Kwasi Kwarteng’s disastrous mini-budget in October 2022 is hitting households over several years.
According to research by the property company Savills, about 690,000 homeowners who are on three-, four-, five-year or longer deals that are up for renewal in 2025 will face increases in their monthly payments. Of these, the vast majority, 575,000, are on five-year deals.
However, almost 350,000 homeowners on two-year fixed mortgages that are up for renewal this year will be able to reduce their costs as they fixed at the peak.
Overall, just over 1 million homeowners will have to renew their fixed mortgage deals this year, down on the 1.2 million in 2024, according to Savills.
Higher interest rates will add £1.27bn to the annual housing costs for property owners remortgaging in 2025, according to Savills. However, the property company pointed out that this was “much less than in each of the preceding two years”.
Lucian Cook, the head of residential research at Savills, said the “pressure on household finances” from rising mortgage costs “has the impact of continuing to suck money out of the economy”.
The Bank has warned that the “full impact of higher interest rates has not yet passed through to all mortgagors”.
The Bank said in November that the typical owner-occupier reaching the end of a fixed rate in the next two years would see their monthly payments increase by 22%, or £146.
However, the share of households who are behind or heavily burdened by mortgage payments remains low by historical standards.
On Friday, Moneyfacts said the average two-year fixed mortgage rate was 5.47%, and the five-year was at 5.25%, unchanged from Thursday. The average two-year tracker rate was 5.47%, also unchanged from Thursday.
Investors are worried about government debt, the level of inflation stubbornly failing to fall to the Bank’s 2% target and confidence in the UK economy, with many businesses citing concerns over the impact of Reeves’s October budget, including increasing employers’ national insurance contributions and the minimum wage.
On Thursday, the government said that the bond markets were “orderly” as the sell-off of gilts continued. After the Treasury chief secretary, Darren Jones, insisted there was “no need” for an emergency intervention, the market calmed somewhat and reversed the day’s gains in the yield – the effective interest rate – on UK government bonds, which are known as gilts.
On Friday morning, the yield on 10-year UK gilts was up two basis points, or 0.02 percentage points, at 4.82%. Long-dated 30-year UK bond yields are almost two basis points higher, at 5.38%. The pound dipped by a third of a cent to $1.227.
On Friday, Nandy tried to provide some reassurance about rising gilt yields. “This is a global trend that we’ve seen affecting economies all over the world,” she told the BBC. Rates rise and fall. We’ve seen it, most notably in the United States, but we are confident that we’re taking both the short-term action to stabilise the economy but also the long-term action that is necessary to get the economy growing again.”
She told Sky News that there was no need to worry and that the UK was “still on track to be the fastest-growing economy, according to the OECD, in Europe”.
