Hundreds of thousands of homeowners in the UK are facing the prospect of higher mortgage rates after borrowing costs in the UK rose sharply.
Biggest lender Virgin Money on Monday raised its new two- and five-year fixed mortgage rates by 0.2%, in line with increases in some remortgage deals.
“Markets have already become less optimistic about how quickly and by how much the base rate might fall this year,” David Hollingworth, associate director at L&C Mortgages, told CNBC via email.
“While interest rates are still expected to fall, the likelihood that the improvements will be smaller and less frequent has already pushed fixed mortgage rates higher,” he added.
Mortgage lenders had been expected to cut borrowing costs this year in line with falling interest rates. But concerns about the country’s economic outlook have contributed to a sell-off in UK government bonds, also known as gilts, pushing back those expectations and suggesting borrowing costs could remain high for longer.
The yield on 10-year UK gilts was hovering around 4.88% on Tuesday, extending its rise after hitting its highest since 2008 last week. Markets now price a 62% chance of the Bank of England cutting rates by 25 basis points at its next meeting in March, according to a poll by LSEG. However, the outlook beyond that point is less clear.
“In the short term, mortgage rates are likely to rise as rising borrowing costs put pressure on lenders,” Matt Smith, mortgage expert at property portal Rightmove, said by email.
That could affect hundreds of thousands of borrowers whose current deals, including those from five years ago when rates were ultra-low, expire this year. So Hollingworth advised borrowers to lock in the new rates now, ahead of further increases, with the option to renegotiate before completion if conditions improve.
Meanwhile, Rightmove’s Smith said the expected rise in property transactions – particularly as buyers look to get ahead of the upcoming stamp duty land rise – could see lenders maintain better rates on loans, at least in the short term.
“Despite the increased costs, we are at the start of what is traditionally the busiest period of the year for the housing market, so I would expect lenders to still want to take advantage of that demand with the most attractive rates possible,” said Smith. Risks to house prices
Higher mortgage rates will also have a ripple effect on house prices, with property portal Zoopla warning that higher rates for longer could change its price growth forecasts for 2025.
“Our forecast for house prices to rise by 2.5% in 2025 implies average mortgage rates of 4.5%. Anything below 5% mortgage rates is consistent with low single-digit house price inflation,” Donnell said by email.
The average rate on a five-year fixed mortgage at 75% loan-to-value (LTV) has risen from 4.1% in October last year to 4.4% at the end of 2024, according to Zoopla.
The average five-year fixed rate was hovering closer to 4.82% as of January 14, according to Rightmove.
“If mortgage rates rise, this will lead to a return to fixed prices and the risk of a modest, single-digit fall in prices,” Donnell said.
House sellers in England and Wales made their lowest profits in a decade, new data showed on Monday, marking the second year of falling cash profits since the market peak in 2022. According to national real estate agency Hamptons, the average seller will see a 42% gross profit margin in 2024 amid a cooling market, up from about 55% in 2022 and 60% in 2016.
Biggest lender Virgin Money on Monday raised its new two- and five-year fixed mortgage rates by 0.2%, in line with increases in some remortgage deals.
“Markets have already become less optimistic about how quickly and by how much the base rate might fall this year,” David Hollingworth, associate director at L&C Mortgages, told CNBC via email.
“While interest rates are still expected to fall, the likelihood that the improvements will be smaller and less frequent has already pushed fixed mortgage rates higher,” he added.
Mortgage lenders had been expected to cut borrowing costs this year in line with falling interest rates. But concerns about the country’s economic outlook have contributed to a sell-off in UK government bonds, also known as gilts, pushing back those expectations and suggesting borrowing costs could remain high for longer.
The yield on 10-year UK gilts was hovering around 4.88% on Tuesday, extending its rise after hitting its highest since 2008 last week. Markets now price a 62% chance of the Bank of England cutting rates by 25 basis points at its next meeting in March, according to a poll by LSEG. However, the outlook beyond that point is less clear.
“In the short term, mortgage rates are likely to rise as rising borrowing costs put pressure on lenders,” Matt Smith, mortgage expert at property portal Rightmove, said by email.
That could affect hundreds of thousands of borrowers whose current deals, including those from five years ago when rates were ultra-low, expire this year. So Hollingworth advised borrowers to lock in the new rates now, ahead of further increases, with the option to renegotiate before completion if conditions improve.
Meanwhile, Rightmove’s Smith said the expected rise in property transactions – particularly as buyers look to get ahead of the upcoming stamp duty land rise – could see lenders maintain better rates on loans, at least in the short term.
“Despite the increased costs, we are at the start of what is traditionally the busiest period of the year for the housing market, so I would expect lenders to still want to take advantage of that demand with the most attractive rates possible,” said Smith. Risks to house prices
Higher mortgage rates will also have a ripple effect on house prices, with property portal Zoopla warning that higher rates for longer could change its price growth forecasts for 2025.
“Our forecast for house prices to rise by 2.5% in 2025 implies average mortgage rates of 4.5%. Anything below 5% mortgage rates is consistent with low single-digit house price inflation,” Donnell said by email.
The average rate on a five-year fixed mortgage at 75% loan-to-value (LTV) has risen from 4.1% in October last year to 4.4% at the end of 2024, according to Zoopla.
The average five-year fixed rate was hovering closer to 4.82% as of January 14, according to Rightmove.
“If mortgage rates rise, this will lead to a return to fixed prices and the risk of a modest, single-digit fall in prices,” Donnell said.
House sellers in England and Wales made their lowest profits in a decade, new data showed on Monday, marking the second year of falling cash profits since the market peak in 2022. According to national real estate agency Hamptons, the average seller will see a 42% gross profit margin in 2024 amid a cooling market, up from about 55% in 2022 and 60% in 2016.
