UK homeowners are preparing for higher mortgage costs following a significant rise in swap rates, the benchmarks lenders use to price mortgages. The five-year swap rate climbed above 4.52% this week, marking its highest level since October 2023. The increase stems from turbulence in global bond markets, triggered partly by escalating tensions between the US and Iran that have pushed oil prices upward, raising inflation concerns among investors.
Escalating oil prices have prompted bond market participants to sell holdings, driving up yields and interest rates across the financial system. The impact on UK gilts, or government bonds, has been more pronounced than in other nations. In response to these market movements, Coventry Building Society became the first major lender to raise mortgage rates across its entire range of fixed-rate products for both new and existing borrowers. UK swap rates, which reflect the interest rates banks charge each other for borrowing, have risen approximately 0.7% compared to levels from a year earlier.
Bank of England policymakers are not expected to adjust official interest rates at their upcoming meeting later this month, though Chief Economist Huw Pill advocated in a recent speech for prompt action to combat inflation rather than adopting a cautious wait-and-see approach. Pill previously voted for a rate increase in July alongside two other committee members, though they were overruled by the majority. Market analysts warn that lenders will likely pass higher borrowing costs to consumers through increased credit card, mortgage, and auto loan rates as they seek to maintain profitability margins.
The yield on 10-year UK government debt reached its highest level since 2008 earlier in the week before retreating following a decline in oil prices. Prime Minister Andy Burnham addressed the market volatility, emphasizing fiscal responsibility in his first appearance at prime minister’s questions. Building society officials suggest the modest rate increases seen so far could prompt borrowers to lock in current rates. As of Thursday, fixed-rate mortgages remained stable, with two-year fixed deals averaging 5.59% and five-year fixes at 5.63%.
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