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Around 700,000 British households will face a jump in mortgage costs when their fixed-rate contracts expire in 2025, as upheavals in UK financial markets in recent weeks threaten to push up borrowing costs.
Mortgage rates were predicted to fall this year, easing the pain for homeowners. But the recent sale in the UK Government Debt Marketsfueled by concerns about persistent inflation and high public borrowing, it could keep borrowing costs higher for longer.
The change also caused a spike in swap rates, which lenders watch closely to price their mortgages.
Two-year interest rate swaps in sterling, which predict the average interest rate over 24 months, rose from just under 4 percent in mid-September to more than 4.5 percent.
The mortgage shock that awaits families this year comes on top of 2.4 million households having to remortgage at higher rates in 2023 and 2024, according to analysis by real estate group Savills.
Lucian Cook, head of residential research at Savills, said the “pressure on household finances” from rising mortgage costs “has the effect of continuing to drain money from economy“.
The vast majority of UK homeowners are fixing their mortgage rate for two or five years, meaning the shock of a big rise in borrowing costs starting in 2022 — and intensifying after Liz Truss’ disastrous “mini-budget” — has hit households for several year.
Rising mortgage payments have been a key contributor to the cost of living crisis. Higher interest rates will add £1.27 billion to annual housing costs for property owners remortgaging in 2025, Savills predicts.
These estimates are based on forecasts that predict remortgage rates will fall to 4.0 percent by the end of the year.
But investors are increasingly concerned about government debt, sticky inflation and the outlook for the UK economy, which has pushed up government borrowing costs and swap rates in the past few weeks.
Simon Gammon, managing partner at Knight Frank Finance, said: “Swaps have moved significantly so pricing pressure is already there for all lenders. . . if the current trend continues with replacements remaining high, we will likely see mortgage rates rise across the board.”
The Bank of England, which last year began cutting its benchmark interest rate from its highest level in 16 years, warned that “the full impact of higher interest rates has not yet passed through to all mortgage borrowers”.
The central bank announced in November that the typical home owner who reaches the end of the fixed rate monthly payment in the next two years will see their monthly payment rise by 22 per cent, or £146.
The proportion of households in arrears or burdened with mortgage payments remains low by historical standards, the BoE added.
The need to absorb higher costs has led many homeowners to delay moving, with fewer people to trade for a more expensive home.
Savills’ Cook said that “only when this is completely washed away . . . will you see people rethinking movement”.
However, there should be some good news for borrowers remortgaging two-year fixed contracts. They have positioned themselves close to the recent peak in borrowing costs and will see their monthly costs drop significantly.
Of just over a million fixed-rate deals ending in 2025, around 340,000 will be two-year deals where borrowers will typically save money by re-mortgaging. The rest were longer repairs where re-laying would be more expensive, Savills said.
Additional reporting by Ian Smith
