The UK’s leading lenders have increased fixed mortgage rates in the wake of Budget-related rises in borrowing costs and market uncertainty. Homeowners and buyers now face a tightening market as rising government bond yields and inflation concerns reshape mortgage pricing.
UK Mortgage Rates Spike as Lenders React to Economic Shifts From the Budget
By Arezki AMIRI
Published on 13 November 2024 17:48
After the recent budget in the UK, major lenders such as NatWest, Barclays, Nationwide, Santander, HSBC, and Virgin Money raised their mortgage rate offers. This action demonstrates the increasing push caused by economic changes linked to swap rates and gilt yields, two important measures for loan pricing, and indicates difficulties to come for UK house owners and purchasers.
Budget’s Impact on Gilt Yields and Swap Rates
The main consequence of the budget is a rise in gilt yields. That is the rates at which UK government pays on its debts. The yield on a gilt is determined by whether investors think the economy will do well and whether the government will manage its finances properly.
The latest budget seems to have made investors pessimistic. Higher pessimism means the government’s borrowing will become costlier. The high yield affects the swap rate, which is the rate at which banks swap variable-rate liabilities for fixed rates.
Swap rates are critical for mortgage pricing, as they set the benchmark for the rate banks pay to fund their fixed-rate mortgages. When, for instance, the bank issues a five-year fixed-rate mortgage, it will usually enter into a five-year interest rate swap to hedge against any future interest rate changes.
The swap rate shows how much it would cost to lock in a fixed rate for a particular time. The increment in swap rates as a result of the budget’s impact has raised the cost of mortgage products, as gilt yields automatically influence swap rates.
New Cost Burdens for Businesses and Inflationary Pressures
The budget also introduced several measures that indirectly impact mortgage markets through their influence on broader economic conditions. Notably, the minimum wage increase and the National Insurance rise add operational costs for businesses, which could ultimately pass through to consumers in the form of higher prices. Higher consumer prices feed into inflationary pressures, creating a potential feedback loop where persistent inflation compels the Bank of England to keep interest rates elevated.
Andrew Bailey, the governor of the Bank of England, has indicated that ongoing inflation could keep the bank’s policy rates high for an extended period. The Office for Budget Responsibility (OBR) projects that mortgage rates could rise to 3.7% in 2024 and potentially reach 4.5% by 2027 if inflation persists. These forecasts reflect a cautious approach, as the Bank of England weighs the risks of inflation against economic stability.
Bank of England’s Careful Approach to Rate Adjustments
In a measured response to inflation, the Bank of England recently cut the base rate to 4.75%, marking a slight easing of policy. However, the bank has signaled that future cuts will be "gradual.” Given that fixed mortgage rates had initially fallen during late summer in anticipation of more aggressive rate cuts, the bank's cautious approach has tempered those expectations.
Instead of reducing rates sharply, the Bank of England aims to manage inflationary pressures without destabilizing economic growth. This gradual approach means that while tracker mortgages may see some immediate relief, fixed-rate mortgage holders will likely face continued pressure from elevated rates.
Technical Breakdown of Mortgage Rate Shifts
The recent adjustments from lenders have raised average two-year fixed mortgage rates to approximately 5.44%, while five-year fixed rates hover around 5.17%, according to Moneyfacts. These average rates are a result of incremental increases from multiple lenders. The following table provides a snapshot of recent rate changes among some major lenders:
| Lender | Average Two-Year Fixed Rate | Average Five-Year Fixed Rate | Rate Increase (%) |
|---|---|---|---|
| NatWest | 5.44% | 5.17% | Up to 0.35% |
| Barclays | 5.42% | 5.16% | Up to 0.35% |
| Nationwide | 5.43% | 5.18% | Up to 0.35% |
| Santander | 5.45% | 5.20% | Up to 0.30% |
| HSBC | 5.46% | 5.19% | Up to 0.30% |
| Virgin Money | 5.47% | 5.17% | Up to 0.30% |
While each lender adjusts rates based on specific cost structures and risk appetites, the broader trend shows a 0.3-0.35 percentage point rise across many fixed-rate products.
Tracker mortgages, meanwhile, remain directly linked to the Bank of England base rate, resulting in lower monthly payments as the bank rate drops. UK Finance calculates that the typical tracker mortgage holder will save around £28.98 on monthly payments, providing some relief in an otherwise high-cost environment. However, this benefit remains limited, as only a subset of borrowers holds tracker products compared to fixed-rate mortgages, which dominate the market.