UK homeowners face the prospect of higher mortgage rates as swap rates reached their highest level in three years, driven by volatility in global bond markets and rising oil prices.
The five-year swap rate climbed above 4.52% on Wednesday, marking the highest level since October 2023. Swap rates, which lenders use to price fixed-term mortgages, have increased by 0.7 percentage points compared to a year ago, according to Yorkshire Building Society.
Bond market volatility
The surge in swap rates follows a sell-off in global bond markets triggered by rising oil prices and inflation concerns. Brent crude reached $95 per barrel before retreating 0.6% on Thursday, as tensions between the US and Iran escalated.
UK gilt yields experienced sharper movements than government bonds in other countries. The yield on 10-year UK government debt hit its highest level since 2008 for a second consecutive day before pulling back.
Russ Mould, investment director at AJ Bell, said: “Credit card, mortgage and auto loan interest rates will rise if bond yields rise, as the lenders seek to preserve loan book margins and manage their risk.”
Impact on mortgage rates
Tom Simpson, managing director of homes at Yorkshire Building Society, noted the market experienced “much more volatility” in March at the start of the Iran conflict. He told the BBC that based on current swap rate movements, “you would expect a modest increase in mortgage rates”.
The 0.1 percentage point increase over the past week remained below the 0.5 percentage point jump recorded in the 10 days following initial US and Israeli airstrikes on Tehran, Simpson added.
Fixed-year mortgage rates remained unchanged on Thursday, according to Moneyfacts data. The average two-year fixed rate stands at 5.59%, whilst five-year fixed deals average 5.63%.
The bond market turbulence comes as property transactions continue to face extended timelines, with the average completion taking 216 days. Industry observers note that higher borrowing costs could further complicate the market for both buyers and investors.
Government response
Prime Minister Andy Burnham addressed the bond market volatility during his first appearance at prime minister’s questions on Wednesday, pledging that autumn budget decisions would be “grounded in fiscal responsibility”.
The bond sell-off has been partly attributed to increased corporate debt issuance by technology companies funding AI infrastructure investment, creating additional competition for government bonds.
The situation mirrors broader challenges facing the property sector, as estate agencies contend with changing market conditions amid economic uncertainty.
Market analysts suggest borrowers concerned about potential rate increases should consult independent mortgage advisers, particularly as volatility can prompt buyers to secure rates before further increases materialise.
