UK homeowners are bracing for higher mortgages as borrowing costs rise

LONDON – Hundreds of thousands of UK homeowners are facing higher mortgage rates after borrowing costs rose across the UK.

High street lender Virgin Money raised its new two- and five-year fixed-rate mortgages by 0.2% on Monday, with increases similar to some remortgage deals.

“Markets are already becoming less optimistic about how quickly and by how much the base rate will come down this year,” David Hollingworth, deputy director at L&C Mortgages, told CNBC via email.

“While interest rate cuts are still expected, the potential for fewer and further hikes has already boosted fixed mortgage rates,” he said.

Mortgage lenders were expected to lower borrowing costs this year along with interest rate cuts. But concerns about the country’s economic outlook a The sale of UK government bonds, also known as gilts, this pushes back expectations and suggests that borrowing costs may remain higher for longer.

Britain’s 10-year gold yield traded around 4.88% on Tuesday, continuing its march higher after hitting its highest level since 2008 last week.

Markets are pricing in a 62% chance of a 25 basis point rate cut by the Bank of England at its next meeting in March, according to the LSEG survey. However, the perspective beyond this point is less clear.

“The short-term impact is that mortgage rates are likely to rise as the rising cost of borrowing hits lenders,” Matt Smith, mortgage expert at property portal Rightmove, said by email.

That could hit hundreds of thousands of borrowers whose current deals, including those secured five years ago when rates were so low, are due to expire this year. So Hollingworth advised borrowers to secure the new rates now, before any further increases, with the option to review them before they expire if conditions improve.

Meanwhile, Rightmove’s Smith said the expected increase in property transactions – particularly as buyers try to get ahead of the upcoming rise in stamp duty Land Tax – could keep lenders more favorable borrowing costs, at least in the short term.

“Despite rising costs, we are at the start of what is traditionally the busiest time of year for the housing market, so I expect lenders will still want to take advantage of this demand with as attractive rates as possible,” Smith said.

Higher mortgage rates will also affect volatility house pricesproperty portal Zoopla warned that higher rates could change price growth forecasts for 2025.

“Our projection of 2.5% home price growth in 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 interest rate on a 75% loan for a five-year fixed mortgage 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 interest rate was close to 4.82%. showed.

“If mortgage rates were to rise, that would see a return to flat rates and the risk of modest, single-digit price declines,” Donnell said.

Home sellers in England and Wales posted their lowest returns in more than a decade last year, fresh data showed on Monday, marking a second year of falling cash profits after the market peaked in 2022.

The average seller will gain 42% in gross profit in 2024 as the market cools, up from about 55% in 2022 and 60% in 2016, according to national estate agents Hamptons.