Sunlight illuminates the facade of a row of Victorian-era houses on a terraced street in Bristol, England.
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LONDON — Hundreds of thousands of British homeowners face the prospect of rising mortgage rates after borrowing costs rose in the United Kingdom.
Major lender Virgin Money increased its new two- and five-year fixed-rate mortgages by 0.2% on Monday, with similar rises for some of its remortgage deals.
“Markets were already becoming less optimistic about the speed and depth of the base rate cut this year,” David Hollingworth, associate director at L&C Mortgages, told CNBC by email.
“Although interest rate declines are still expected, the possibility of more and more frequent improvements has already pushed up fixed mortgage rates,” he added.
Mortgage lenders were expected to cut borrowing costs this year alongside a drop in interest rates. But concerns about the country’s economic outlook contributed to a sell-off in British government bonds, also known as gilts, pushing back against those expectations and suggesting borrowing costs could remain high for longer.
The yield on Britain’s 10-year government bonds was hovering around 4.88% on Tuesday, continuing to rise after hitting its highest level since 2008 last week.
Markets now give a 62% chance of a 25 basis point rate cut from the Bank of England at its next meeting in March, according to an LSEG poll. The prospects beyond this point, however, are less clear.
“The short-term impact is that mortgage rates are likely to rise as the increased cost of borrowing impacts lenders,” property portal mortgage expert Matt Smith said via email. Rightmove.
This could affect hundreds of thousands of borrowers whose current contracts – including those entered into five years ago when rates were extremely low – are set to expire this year. As such, Hollingworth advised borrowers to secure new rates now, before any further hikes, with the option of revisiting them before the end if conditions improve.
At the same time, Rightmove’s Smith said an expected rise in property transactions – particularly as buyers look to pre-empt an upcoming land stamp duty increase – could lead lenders to retain more favorable borrowing costs, at least in the short term.
“Despite the increase in costs, we are at the start of what is traditionally the busiest time of year for the property market, so I expect lenders will still want to take advantage of this demand by offering rates as attractive as possible,” Smith noted.
Risks for property prices
Higher mortgage rates would also have a knock-on effect on house prices, with property portal Zoopla warning that higher rates for a longer period could change its price growth forecast for 2025.
“Our forecast for house price growth of 2.5% during 2025 assumes average mortgage rates of 4.5%. Any mortgage rate below 5% is consistent with low house price inflation. “single-digit real estate,” Donnell said via email.
The average rate for a five-year fixed mortgage at 75% loan-to-value (LTV) has risen 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 closer to 4.82%, according to data from Rightmove.
“If mortgage rates were to increase, it would result in a return to stable prices and a risk of modest, single-digit price declines,” Donnell said.
House sellers in England and Wales recorded their lowest returns in more than a decade last year, new data showed on Monday, the second year of falling cash profits after the market peak in 2022.
The average seller made 42% gross profit in 2024 as the market cooled, according to Hamptons National Realtors, compared to about 55% in 2022 and 60% in 2016.
