LONDON — Hundreds of thousands of U.K. homeowners are facing the prospect of higher mortgage rates after a spike in U.K. borrowing costs.
Major high street lender Virgin Money on Monday increased its new two- and five-year fixed-rate mortgages by 0.2%, with similar hikes to some of its remortgage deals.
“Markets were already becoming less optimistic about how quickly and how far [the] base rate might fall this year,” David Hollingworth, associate director at L&C Mortgages, told CNBC via email.
“Although there are still expected to be cuts in interest rates, the potential for improvements to be fewer and further between has already edged fixed mortgage rates up,” he added.
Mortgage lenders had been expected to lower borrowing costs this year alongside an easing of interest rates. But concerns over the country’s economic outlook have contributed to a sell-off in U.K. government bonds, also known as gilts, pushing back these expectations and suggesting that borrowing costs could stay higher for longer.
The U.K.’s 10-year gilt yield was hovering around 4.88% Tuesday, continuing its march higher after reaching its highest level since 2008 last week.
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Markets are now pricing in a 62% chance of a 25 basis point rate cut from the Bank of England at its next meeting in March, according to an LSEG poll. The outlook beyond that point is less clear, however.
“The short term impact is that mortgage rates are likely to rise, as the cost of borrowing increases impacts lenders,” Matt Smith, mortgage expert at property portal Rightmove, said via email.
That could hit hundreds of thousands of borrowers whose current deals — including those secured up to five years ago when rates were super low — are set to expire this year. As such, Hollingworth advised borrowers to secure new rates now, before any further hikes, with the option to revisit them before completion if conditions improve.
Meanwhile, Rightmove’s Smith said that an anticipated uptick in property transactions — particularly as buyers seek to get ahead of a forthcoming increase in Stamp Duty Land Tax — could see lenders retain more favorable borrowing costs, at least over the short-term.
“Despite increased costs, we’re at the start of what is traditionally the busiest period of the year for the housing market, so I expect lenders will still want to take advantage of this demand through as attractive rates as possible,” Smith noted.
Risks for property prices
Higher mortgage rates would also have a ripple effect on home prices, with property portal Zoopla warning that higher-for-longer rates could alter its 2025 price growth forecasts.
“Our forecast for 2.5% house price growth over 2025 assumes average mortgage rates of 4.5%. Anything below 5% mortgage rates is consistent with low single-digit house price inflation,” Donnell said via email.
The average rate for a five-year fixed mortgage at 75% loan-to-value (LTV) increased from 4.1% last October to 4.4% at the end of 2024, according Zoopla.
As of Jan. 14, the average five-year fixed rate hovered closer to 4.82%, Rightmove data showed.
“If mortgage rates were to move higher, then this would see a return to flat prices and the risk of modest, single-digit price falls,” Donnell said.
Home sellers in England and Wales made their lowest returns in over a decade last year, fresh data showed Monday, the second year of declines in cash profits after the market peaked in 2022.
The average seller made 42% in gross profit in 2024 as the market cooled, according to national estate agents Hamptons, down from around 55% in 2022 and 60% in 2016.