The New Year has seen a sharp spike in UK borrowing costs,leaving many homeowners and buyers wondering what impact this will have on mortgage rates.
The yield on 10-year bonds reached its highest level since the 2008 financial crash in the first week of 2025, with the yield on 30-year bonds now at its highest level in 27 years, making it much more expensive for the Government to borrow.
Higher inflation, rising tax bills and concerns that the UK economy is likely to remain in the doldrums for the foreseeable future have all contributed to the jump in borrowing costs. Global uncertainty also hasn’t helped, with the incoming President Donald Trump promising tariffs and tax cuts, which could see UK inflation remain above the government’s 2% target for longer.
What does this mean for your mortgage?
If inflation stays higher for a prolonged period, this means we’re unlikely to see interest rates fall by as much as had previously been hoped over the next few months. Markets are currently pricing in two rate cuts this year, with many commentators expecting the first reduction in 2025 to happen next month.
A prolonged period of higher interest rates could be painful for people with mortgages linked to the Bank of England base rate, although it won’t impact those currently locked into fixed rates.
Fixed rate mortgages are linked to swap rates, which are the rates that lenders must pay other financial institutions to acquire fixed funding for a set term. Swap rates tend to rise when base rate increases are expected, or when rates are expected to remain higher for longer, and this in turn can push up the cost of fixed rate mortgage deals.
However, swap rates have already edged up over the past month and as yet haven’t jumped sharply in response to higher borrowing costs. Some lenders, such as HSBC, even cut their fixed mortgage rates this week, while others have raised rates, so there’s no clear trend emerging as yet. That said, rates can change quickly, and if swap rates do increase further, we’re likely to see more fixed rates move higher.
If you’re approaching the end of your current mortgage deal, you should keep a close eye on rates, and act quickly if you spot a deal you like. Most lenders will allow you to secure your next mortgage deal three or six months before you need it to start, so if you lock in a deal now, you’ll have peace of mind that if rates do rise, you already have a competitive deal in the bag.
If, however, rates come down after you’ve chosen a mortgage, there will still be time to switch to a better deal if one becomes available.
