Hundreds of thousands of UK homeowners are facing an unsettling prospect: rising mortgage rates driven by a spike in borrowing costs. This significant shift in the financial landscape emerges as the UK's 10-year gilt yield has been steadily climbing, reaching 4.88% on Tuesday after hitting its highest level since 2008 last week. The anticipated rate cut from the Bank of England has added to the complex dynamics influencing the housing market.
In recent years, home sellers in England and Wales have seen a steady decline in their returns. In 2024, the average seller earned a gross profit of 42%, a noticeable drop from approximately 55% in 2022 and 60% in 2016. This decline marks the lowest returns for home sellers in over a decade. Market analysts attribute this trend to a combination of factors, including shifting interest rates and changing buyer behaviors.
The Bank of England's monetary policy plays a pivotal role in shaping mortgage rates. Currently, markets predict a 62% chance of a 25 basis point rate cut at the Bank's next meeting in March, following a similar expected cut in February. However, the outlook beyond these meetings remains uncertain. As a result, mortgage lenders had been anticipated to lower borrowing costs this year, but these expectations face challenges.
Virgin Money, a major high street lender, increased its new two- and five-year fixed-rate mortgages by 0.2% on Monday, along with similar hikes on some remortgage deals. This move reflects the broader trend where average five-year fixed rates approached 4.82% as of January 14, according to Rightmove data. Similarly, Zoopla reports an increase in the average rate for a five-year fixed mortgage at 75% loan-to-value from 4.1% last October to 4.4% by the end of 2024.
"Despite increased costs, we're at the start of what is traditionally the busiest period of the year for the housing market, so I expect lenders will still want to take advantage of this demand through as attractive rates as possible," said Smith.
The UK's housing market is poised for an uptick in property transactions as buyers aim to stay ahead of an anticipated increase in Stamp Duty Land Tax. This surge in activity could help lenders maintain more favorable borrowing costs in the short term. However, analysts caution that any rise in mortgage rates could lead to stagnant prices and even modest declines.
"If mortgage rates were to move higher, then this would see a return to flat prices and the risk of modest, single-digit price falls," noted Donnell.
The forecast for a 2.5% house price growth over 2025 assumes average mortgage rates will stabilize around 4.5%. This assumption hinges on maintaining mortgage rates below 5%, which aligns with low single-digit house price inflation.
"The short term impact is that mortgage rates are likely to rise, as the cost of borrowing increases impacts lenders," remarked Matt Smith.
Additionally, market experts highlight that while cuts in interest rates are expected, improvements may be less frequent, contributing to the upward trend in fixed mortgage rates.
"Although there are still expected to be cuts in interest rates, the potential for improvements to be fewer and further between has already edged fixed mortgage rates up," according to David Hollingworth.