Sunlight illuminates the facade of a row of Victorian-era houses on a terraced street in Bristol, England.
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LONDON – Hundreds of thousands of UK homeowners face the prospect of higher mortgage rates after UK borrowing costs rose.
Virgin Money, a major bank, on Monday increased its new two- and five-year fixed-rate mortgages by 0.2%, with similar rises for some remortgage deals.
“Markets are already becoming less optimistic about how quickly and how far the base rate will fall this year,” David Hollingsworth, associate director at L&C Mortgages, told CNBC via email.
“Although interest rate cuts are still expected, the likelihood that improvements will be few and far between has already pushed fixed mortgage rates higher,” he added.
Mortgage lenders were expected to reduce borrowing costs this year alongside easing interest rates. But concerns about the country's economic outlook contributed to this Heavy selling of British government bonds, also known as government bonds, Which undermines these expectations and suggests that borrowing costs could remain higher for longer.
The yield on 10-year British government bonds hovered around 4.88% on Tuesday, continuing its upward march after reaching its highest level since 2008 last week.
Markets now expect 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. But the outlook after that point is less clear.
“The short-term impact is that mortgage rates are likely to rise, as the cost of borrowing impacts lenders,” Matt Smith, a mortgage expert at property portal Rightmove, said via email.
That could affect hundreds of thousands of borrowers whose existing deals – including those locked in up to five years ago when interest rates were very low – are set to expire this year. As such, Hollingsworth advised borrowers to lock in the new interest rates now, before any further increases, with the option to revisit them before expiry if conditions improve.
Meanwhile, Rightmove's Smith said an expected rise in property transactions – particularly as buyers seek to push ahead with an expected increase in stamp duty land tax – could see lenders retain more favorable borrowing costs, at least in the short term.
“Despite the increase in costs, we are at the beginning of what is traditionally the busiest period of the year for the housing market, so I expect lenders will still want to capitalize on this demand with interest rates that are as attractive as possible,” Smith noted.
Real estate price risks
Higher mortgage rates will also have a multiplier effect House pricesWith property portal Zoopla warning that higher rates for longer may change its price growth forecast for 2025.
“Our 2.5% home price growth forecast through 2025 assumes mortgage interest rates average 4.5%,” Donnell said via email. “Anything below 5% mortgage interest rates is consistent with lower component home price inflation.” From one number.
The average five-year fixed mortgage rate at 75% loan-to-value (LTV) rose from 4.1% last October to 4.4% at the end of 2024, according to Zoopla.
As of January 14, the average five-year fixed rate was close to 4.82%, according to Rightmove data. Show.
“If mortgage interest rates rise, this will see a return to fixed rates and the risk of a modest single-digit drop in rates,” Donnell said.
Home sellers in England and Wales made their lowest returns in more than a decade last year, the second year of declines in cash gains after the market peaked in 2022, new data showed on Monday.
The average seller made 42% of gross profit in 2024 as the market slowed, according to national real estate agents Hamptons, down from about 55% in 2022 and 60% in 2016.
