Sunlight illuminates the front of a row of Victorian houses on a terraced street in Bristol, England.
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LONDON – Hundreds of thousands of UK homeowners are facing the prospect of higher mortgage rates following a jump in UK borrowing costs.
Major lender Virgin Money increased its new two-year and five-year fixed-rate mortgages by 0.2% on Monday, with similar increases for some of its remortgage deals.
“Markets have already become less optimistic about how soon and how far [the] prime rate could come down this year,” David Hollingworth, associate director at L&C Mortgages, told CNBC via email.
“While interest rate cuts are still expected, the possibility of improvements that will be smaller and further between has already boosted fixed mortgage rates,” he added.
Mortgage lenders were expected to lower borrowing costs this year as interest rates fell. But concerns about the country’s economic prospects contributed to a the sale of UK government bonds, also known as gilts, suppressing these expectations and suggesting that borrowing costs could remain higher for longer.
Britain’s 10-year gilt yield was hovering around 4.88% on Tuesday, continuing its climb after hitting its highest level since 2008 last week.
According to the LSEG survey, markets now see a 62% chance of a 25 basis point interest rate cut by the Bank of England at its next meeting in March. However, the view beyond that point is less clear.
“The short-term effect is that mortgage rates are likely to rise, as borrowing costs rise and affect lenders,” Matt Smith, mortgage expert at real estate portal Rightmove, said by email.
This could affect hundreds of thousands of borrowers whose current contracts – including those secured five years ago when rates were super low – expire this year. As such, Hollingworth advised borrowers to secure the new rates now, before any further increases, with the option to revisit them before the end if conditions improve.
Meanwhile, Rightmove’s Smith said an expected surge in property transactions – particularly as buyers seek to get ahead of the upcoming land tax hike – could see lenders retain more favorable borrowing costs, 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 expect lenders will continue to look to capitalize on this demand through attractive rates,” noted Smith.
Risks to real estate prices
Higher mortgage rates would also have a knock-on effect on house pricesand real estate portal Zoopla warns that higher rates for longer could change its price growth forecasts for 2025.
“Our forecast for home price growth of 2.5% through 2025 assumes average mortgage rates of 4.5%. Anything below 5% mortgage rates is consistent with low single-digit home price inflation,” Donnell said via email.
The average rate for a five-year fixed mortgage at 75% loan-to-value (LTV) rose from 4.1% last October to 4.4% at the end of 2024, according to Zoopla.
As of January 14, the average five-year fixed rate was hovering closer to 4.82%, data from Rightmove showed.
“If mortgage rates were to rise, that would lead to a return to fixed rates and the risk of modest, single-digit price declines,” Donnell said.
House sellers in England and Wales made the lowest returns in more than a decade last year, new data showed on Monday, the second year of falling cash profits since the market peaked in 2022.
The average seller made 42% of the gross profit in 2024 as the market cooled, according to Hamptons National Realtors, down from about 55% in 2022 and 60% in 2016.
