Sunlight illuminates the front of a row of Victorian-era houses on a terraced street in Bristol, England.
Matt Cardy | Getty Images News | getty images
LONDON – Thousands of British homeowners are facing the prospect of higher mortgage rates after the cost of borrowing in the UK soared.
Major high street lender Virgin Money increased its new two- and five-year fixed rate mortgages by 0.2% on Monday, with similar increases for some of its resale deals.
“Markets were already becoming less optimistic about how quickly and how far the base rate might fall this year,” David Hollingsworth, associate director of L&C Mortgage, told CNBC via email.
“While there is still hope for interest rate cuts, the prospects for a recovery are slim and already fixed mortgage rates are on the rise,” he said.
Mortgage lenders expected interest rates to ease this year as well as lower borrowing costs. But concerns over the country’s economic outlook have contributed to A selloff in British government bonds, also known as gilts, Pushing back these expectations and suggesting that borrowing costs could remain high for a long time.
Britain’s 10-year gilt yield was hovering around 4.88% on Tuesday, continuing to rise after reaching its highest level since 2008 last week.
According to the LSEG survey, markets are now considering a 62% chance of a 25 basis point rate cut at the Bank of England’s next meeting in March. However, the outlook from that point forward is less clear.
“The short-term impact is that mortgage rates are likely to rise, as rising borrowing costs hit lenders,” Matt Smith, mortgage expert at property portal Rightmove, said via email.
This could impact thousands of borrowers whose existing deals – including those secured up to five years ago, when rates were much lower – are due to expire this year. Thus, Hollingsworth advised borrowers to secure the new rates ahead of any further increases, with the option to reconsider them before completion if conditions improve.
Meanwhile, Rightmove’s Smith said the anticipated increase in property transactions – particularly as buyers look to get ahead of the upcoming increase in stamp duty land tax – could help lenders maintain more favorable borrowing costs, at least in the short term.
Smith said: “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 expect lenders will still want to take advantage of this demand through rates that are as attractive as possible. “
Risk to asset prices
Higher mortgage rates will also have an impact House pricesProperty portal Zoopla has warned that higher long-term rates could change its 2025 price growth forecasts.
“Our forecast for 2.5% home price growth in 2025 assumes an average mortgage rate of 4.5. A mortgage rate below 5% is consistent with low single-digit home price inflation,” Donnell said via email.
According to Zoopla, the average rate for a five-year fixed mortgage at 75% loan-to-value (LTV) increased from 4.1% last October to 4.4% by the end of 2024.
As of Jan. 14, the average five-year fixed rate was near 4.82%, Rightmove data showed,
“If mortgage rates go higher, that would lead to a return to flat prices and the risk of modest, single-digit price declines,” Donnell said.
Home sellers in England and Wales made the lowest returns in more than a decade last year, the latest data showed, marking the second year of declining cash profits since the market peaked in 2022.
According to national estate agents Hampton, the average seller will make 42% in gross profit in 2024 as the market cools, up from about 55% in 2022 and 60% in 2016.