Mortgage rates could rise due to the government bond turmoil, with the UK 10-year gilt yield hitting its highest level since the financial crisis.
Last week, gilt yields surged, likely due to Labour's first Budget in October as well as potential policies from president-elect Donald Trump.
Annuity rates have increased as a result, and mortgage rates have edged up slightly.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
According to data analyst Moneyfacts, the average two-year fixed mortgage rate today is 5.48%, up from 5.47% on Friday. The average five-year deal is 5.26%, up from 5.25%.
Mortgage rates are influenced by swap rates, which are affected by things like bond yields and interest rates.
Frances Haque, chief economist at Santander UK, comments: “This month, we’re already seeing swap rates edge up as they respond to volatility in the bond market, caused by an uncertain economic outlook for 2025 both at home and abroad. As such, lenders may well – in the short-term - nudge up pricing to reflect the higher swaps."
Laith Khalaf, head of investment analysis at the investment platform AJ Bell, agrees that mortgage rates could climb higher. “Rising bond yields mean we are likely to see firmer pricing in the mortgage market, which will go down like a cup of cold cauliflower soup for anyone who is remortgaging or has decided to make the first giant leap onto the housing market."
Last January, mortgage lenders kicked off 2024 with a flurry of big rate cuts in a battle for market share.
This year, a few lenders have welcomed in the New Year with some rate reductions - but others have started to raise rates as the bond market disruption filters through.
Homebuyers and remortgage customers have been on a rollercoaster over the past few months, with some lenders cutting rates, others hiking rates - and some lenders doing both simultaneously.
The increases came despite the Bank of England cutting interest rates from 5% to 4.75% in November.
The volatility in the mortgage market followed Rachel Reeves's Autumn Budget, which announced a series of policies that would cost almost £70 billion, half of which would be paid for by tax hikes and greater tax compliance.
Within hours of the Budget, Virgin Money announced rate increases of up to 0.15% across its range. Some smaller mortgage lenders withdrew deals and Santander, HSBC, Nationwide and TSB also hiked rates.
According to Moneyfacts, average five-year fixed mortgage rates saw their biggest monthly rise since August 2023.
So, what could happen to mortgage rates this year? How much will the bond turmoil affect mortgage deals - and could mortgage rates fall if the Bank cuts interest rates again?
Which mortgage lenders are raising rates?
Coventry Building Society has announced it will increase fixed mortgage rates as of today (13 January). Skipton, Leeds Building Society and TSB have also announced hikes.
Meanwhile, Virgin Money is withdrawing its 80% LTV (loan-to-value) Purchase 2 & 5 year fixed-rate deals and increasing 10 other mortgage rates. Some smaller mortgage lenders have hiked rates too.
Experts expect that we could see more mortgage rate increases as the gilt drama fallout continues.
Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: "The rise in gilt yields always raises the spectre of rising fixed mortgage rates, because they’re very responsive to changes in interest rate expectations.
"Very slightly higher rates have been brought in by some mortgage lenders, who had to secure a fixed rate in the swap markets while they’re more expensive, but as yet there’s nothing more widespread. This is likely to filter into more deals, but it’s not yet clear how long this disruption in the bond markets will last."
Thankfully, the response from the mortgage market so far has not been anything like the panic seen after the 2022 mini-Budget.
In the wake of Liz Truss's mini-Budget, not only did two and five-year fixed deals go up by more than a percentage point, 1,700 lender products - 40% of the market at the time - disappeared from sale in the space of a week.
Which mortgage lenders are cutting rates?
Several mortgage lenders have announced mortgage rate cuts. HSBC is cutting some of its rates today (13 January), including for first-time buyer, home mover and remortgage customers.
Principality building society is reducing some of its residential, buy-to-let and holiday let mortgage deals tomorrow (14 January).
Its residential fixed rates are being cut by up to 0.3%, while buy-to-let rates are falling by up to 0.21%.
Skipton International has also kicked 2025 off by trimming its new business five-year fixed rates, which now start at 4.99%, and also launching a three-year fixed rate, starting at 5.89%.
What is the forecast for mortgage rates?
We could continue to see a mix of some mortgage lenders putting rates up while others cut them during the next few weeks.
It will depend on what happens to swap rates, which in turn depends on bond yields and interest rate expectations.
Nicholas Mendes, mortgage technical manager at the broker John Charcol, tells MoneyWeek: "Increased government borrowing and ongoing economic uncertainty have pushed gilt yields higher, which in turn drives up swap rates. Lenders are absorbing these increased costs for now, but they can only do so for a limited time before being forced to adjust their mortgage products."
He says the upward pressure on mortgage rates right now is "undeniable".
Coles warns: "If more worrying news comes out of the US, or fears of stagflation spread, bond yields could remain higher, and if this happens, there’s more of a chance it will be reflected in more widespread higher mortgage rates.”
But, if yields drop, then mortgage rates could fall (or at least, the rate hikes could ease).
Looking further into 2025, the outlook for mortgage rates will be affected by interest rate expectations and other economic data like inflation.
The Bank of England cut interest rates twice last year; the base rate now stands at 4.75%. The next Monetary Policy Committee (MPC) meeting at the Bank of England is on 6 February. The market is currently pricing in just over a 60% chance of a rate cut next month.
Frances Haque at Santander UK comments: "With just less than a month to go until the next MPC announcement, all eyes are on this week’s inflation and GDP data to give some indication of how close the next cut from the Bank will be.
"As it stands, with inflation proving to be more persistent, but with growth weakening, the MPC is likely to proceed cautiously. Our own forecasts continue to expect a further four cuts over the course of this year, with base rate ending the year at 3.75%, and remaining between 3-4% for the foreseeable.”
Some economists are forecasting that interest rates will drop further, possibly to 3.25% or 3.5% by the end of the year. However, stubborn inflation could hold back the pace of interest rate cuts.
The market is currently pricing in two rate cuts in 2025.
Bear in mind that the mortgage rate is just one aspect of a deal. Borrowers need to watch out for extra mortgage costs as some deals have high fees attached that could offset any savings compared with other deals with higher rates but lower charges.
What's mortgage availability like?
The number of mortgage deals on offer is holding up well, despite the turmoil in the financial markets.
According to Moneyfacts, there are 6,508 mortgage products, substantially higher than a year ago (5,899).
The average shelf-life of a mortgage product stands at 21 days, as it was a month prior.
Should you fix your mortgage?
If the last two years of rises and falls have told us anything, it's that predicting falls in mortgage rates is not an exact science. So, if your fix is expiring this year, should you opt for a fixed deal?
"Acting promptly in the current uncertain market can provide peace of mind and financial stability, as locking in a rate now may offer protection against future increases," advises Mendes.
However, do double-check the time window for locking in a new deal, as some lenders have reduced theirs to just three or four months.
According to Moneyfacts, the rate gap between the average two- and five-year fixed mortgage has dropped to its lowest margin in two years; the gap is now just 0.23 percentage points.
Rachel Springall, finance expert at Moneyfacts, comments: "However, it remains the case that the average five-year mortgage rate is lower than its two-year counterpart, which may be more enticing for those who want peace of mind for longer when it comes to their monthly mortgage repayments."
What about variable mortgage rates?
About 2.2 million homeowners are on variable-rate mortgages, which are linked to the Bank of England’s base rate. The average standard variable rate (SVR) is an eye-watering 7.81%. The average two-year tracker costs 5.47%.
Those on a high SVR would be wise to switch onto a fixed rate now. Even if fixed rates fall later this year, the money they save from getting rid of their expensive SVR earlier could make it worth it.
Springall notes: "It’s wise for borrowers to not delay refinancing their deal, as falling onto a revert rate would be costly. Those coming off the average five-year fixed deal from January 2020 would have been charged 2.74%, but the average SVR is now 7.81%, more than 5% higher.”
What about buy-to-let rates?
Interestingly, buy-to-let mortgage rates look quite competitive. They have fallen in recent days, and are not dissimilar to other deals.
The average two-year buy-to-let mortgage rate today is 5.35%. This is down from 5.37% on Friday. The average five-year buy-to-let fix is 5.45%, down from 5.48%.
However, the number of products on offer has dropped. There are currently 3,259 buy-to-let mortgage products available, according to Moneyfacts. This is down from 3,541 on Friday.
The new 5% stamp duty surcharge and less generous mortgage interest tax relief are making things tough for landlords. There is a record number of previously-rented homes being listed for sale, as financial strain pushes landlords to sell up.
Mortgage support available
Mortgage rates are much higher than when many people would have last remortgaged. Millions of homeowners will be coming off rates as low as 1% or 2%.
If you’re struggling to make your mortgage repayments, the good news is that lenders representing 90% of the mortgage market have signed up to the government’s mortgage charter. They include the big banks like Halifax, HSBC and Santander and building societies like Nationwide, Leeds and Skipton.
The charter is a series of support measures intended to help those in difficulty. Borrowers will be able to make a temporary change to their mortgage for six months to give them some breathing space, such as switching to interest-only payments or extending their mortgage term to reduce their monthly payments. Customers have the option to revert to their original term within six months by contacting their lender.
Around 1.4 million mortgages have benefitted from the mortgage charter since it was introduced in June 2023, according to data from the City watchdog.
Meanwhile, there is a 12-month delay before repossession proceedings can start against those who have missed payments. Regardless of whether your lender has signed up to the charter, all lenders also have a range of measures in place for customers experiencing difficulties.
Should I overpay my mortgage?
If you’ve got some spare cash and you're on a low rate, overpaying your mortgage can be a good way to protect yourself before your mortgage deal expires and you have to remortgage at a higher rate.
Our mortgage overpayment calculator shows how your monthly repayments will change and help you decide if it is worth it.
-
What investors can expect from stocks and economies in 2025There are reasons for investors to be hopeful about 2025, with slowing interest rates and moderating oil prices. But trouble may be brewing in bond markets
-
Is Xi Jinping ready for Donald Trump's tariffs on China?The ascent of Donald Trump will bring new challenges for Xi Jinping
