MORTGAGE rates for Brits are “days away from wholesale increases” as UK borrowing costs hit their highest level since the 2008 financial crisis.
Bond yields have risen sharply, increasing government borrowing costs and renewing concerns about whether current levels of public debt are sustainable.
In the UK, the 10-year gilt yield reached approximately 5.25% on 1 September, its highest level since the 2008 financial crisis. 30-year gilt yields have approached 5.9%, close to levels last seen in 1998.
Governments accumulated significant debts following the financial crisis, the pandemic and the energy shock, while also funding ageing populations and persistent budget deficits. Much of this borrowing was undertaken when interest rates were exceptionally low.
Higher inflation, rising oil prices and expectations that interest rates will remain elevated mean investors are now demanding greater returns to lend to governments. For the UK, higher debt-interest costs could leave less money available for public services, tax cuts and investment.
Bill
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said mortgage rates will increase very soon.
He added: “Any increase in bond yields sharply affects our economy, so if this continues for more than a few days, it will have a lasting impact on our economy and our pockets. Mortgage rates are days away from wholesale increases, specialist lenders have already moved, and others will have to follow.
“Higher bond yields will also push inflation higher, as the government will need to spend more just to cover its own debt costs. It’s a self-defeating prophecy: the government needs to act swiftly before Labour looks for a handout, as they did in the 1970s.”
Darryl Dhoffer, Founder at Bedford-based The Mortgage Geezer, agreed that the pressure on mortgages is going to mean rates increase.
He added: “The era of cheap debt is over, and the bond market is demanding fiscal discipline. With UK gilt yields touching multi-decade peaks, the Chancellor faces severe fiscal pain. Servicing sovereign debt at over 5% consumes billions that could otherwise fund public services, virtually ensuring higher taxes and squeezed budgets ahead. While elevated yields reflect sticky inflation expectations and tighter monetary policy, they are a double-edged sword.
“Higher borrowing costs curb demand to cool price growth, but rising debt-servicing costs risk fuelling fiscal deficits. For households, this means prolonged mortgage pressure and an unavoidable tax burden, though savers and retirees securing annuities will see their best rates in decades.”
Dave Huggett, Founder at Lucid Foreign Exchange, said the Bank of England is between a rock and a hard place.
He added: “As gilts rise further, the Bank of England faces the impossible decision of ‘Growth vs Inflation’. 10-year gilts are now trading at 5.25%, and the MPC is running out of options when it comes to interest rate decisions. But the choices are both bleak: hold rates and risk further issues in the bond market, or raise rates and risk stifling any hope of improvements in GDP.
“But there may be one card left to play. Econometrically, raising rates protects or improves GBP strength, which also helps fight imported inflation. But all these moves are ‘lagging’. Decisions today take months to take effect, and they also take months to undo if you get it wrong.”
“This isn’t 2008. Then the banks were broken and governments stepped in. Today, the governments themselves are stretched, and the foreign buyers who used to fund them, Japan above all, are heading home. The real question for savers isn’t whether yields go higher, but what their money will be worth when they do.”
Inflation
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said the Pound will be affected by rising debt in the UK.
She added: “Rising gilt yields aren’t a market tantrum, they’re the bill arriving. Britain borrowed for 15 years as if near zero rates were here to stay when they were only ever an emergency measure. Now a large chunk of that debt has to be rolled over at 5% and more, and there’s no cheap money left to do it with.
“The Treasury has three doors: raise taxes, cut spending, or lean on the Bank of England to hold rates down. The first two are politically poisonous, so expect the third, and that means the Pound quietly pays the price. Mortgages follow the gilt curve up, so house prices come under strain. Annuity rates look tempting, but a fixed income is only worth what sterling still buys.
Riz Malik, Independent Financial Adviser at Southend-on-Sea-based R3 Wealth, said inflation is a real concern.
He added: “Borrowing costs could increase as inflationary concerns sweep through the markets. We all know the bond market affects our lives more than we would like, and it will be interesting to see how the new prime minister and chancellor handles this as it impacts households and businesses alike.
“One thing is for sure: the prolonged war in Iran and its impact on energy costs are certainly not helping, as oil gets close to $100 per barrel.”
Paul Denley, CEO at London-based Oakham Wealth Management, said the whole world is struggling.
He added: “This isn’t just a UK story, it’s a global one. Yields are at post-2008 highs in Britain, post-2011 highs in Germany, and post-1996 highs in Japan. Geopolitical tensions and higher oil prices triggered the latest move, but the longer term issue is that the cheap money era, when governments could accumulate debt at very low cost, is over. Britain is particularly exposed.
“Since 2022, gilt yields have moved from the middle of the G7 pack to the top, leaving us more vulnerable to rising global borrowing costs. Refinancing debt at 5% rather than 1% means more tax revenue consumed by interest, less room for public spending and potentially weaker growth.
“For households, it cuts both ways. Mortgages become more expensive, while savers and annuity buyers benefit from higher rates. Is this 2008? No. Then, banks were the problem and governments the rescuers. Today, the strength of government balance sheets is increasingly in sharp focus.”
