UK mortgage borrowers face higher borrowing costs after five-year swap rates climbed to their highest level since October 2023, according to financial experts. The rise follows a global bond sell-off that has pushed up gilt yields, with lenders expected to pass on the increase to consumers through higher fixed-term mortgage rates.
Swap rates surge to three-year high
The five-year swaps rate rose above 4.52% yesterday, its highest level since October 2023, according to LSEG data. Swap rates are the interest rates that banks charge when they borrow from each other, and they directly influence the pricing of fixed-term mortgages in the UK.
Although the turmoil in the bond markets has cooled for now, the consequences of the jump in bond yields could be serious for borrowers, analysts warn. The rise in gilt yields has pushed up swap rates, and mortgage lenders are expected to adjust their fixed-term rates accordingly.
Bond sell-off drives up borrowing costs
Russ Mould, investment director at AJ Bell, explained that credit card, mortgage, and auto loan interest rates will rise if bond yields rise, as lenders seek to preserve loan book margins and manage their risk. Such moves would undermine Andy Burnham’s push to ease cost of living pressures, Mould added.
Yesterday, the yield on UK 10-year government debt hit its highest level since 2008, before retreating to less painful levels thanks to a drop in the oil price. Oil has been one of the key factors driving the bond market sell-off, as inflationary pressures from high prices could force central banks to raise interest rates.
Modest increase expected, says building society
Tom Simpson, managing director of homes at Yorkshire Building Society, told Radio 4’s Today Programme that “all things being equal, you would expect a modest increase in mortgage rates based on what we’ve seen so far.” Simpson emphasised that the moves in the swaps market are more modest than six months ago: “A 0.1 [percentage point] increase, which is what we’ve seen over the last week, is much less of an increase than when we saw a 0.5 [percentage point] increase in 10 days in March when the Iran war broke out.”
Economic data on the agenda
Today’s economic calendar includes the Eurozone services PMI report for August at 9am BST, the UK services PMI report for August at 9.30am BST, and the ONS Business insights and impact on the UK economy at 9.30am. Later, at 10.30am, the Challenger survey of US Job Cuts is due, followed by the US services PMI report for August at 3pm BST.
The rise in swap rates is expected to feed through to mortgage pricing in the coming weeks, with borrowers on fixed-term deals likely to face higher rates when they remortgage, while new borrowers may see less favourable deals compared to earlier in the year.
