The yield on 30-year UK government bonds surpassed 6% on Thursday, for the first time since 1998, as a sell-off in global bond markets pushed borrowing costs from the United States to Japan to their highest levels in a decade and added pressure to the global mortgage market.
Nicholas Mendes, mortgage director at broker John Charcol, said rising bond yields would lead to further increases in mortgage rates as banks pass higher funding costs on to homebuyers.
Growing pressure on UK households
The pricing of fixed-rate mortgages in the UK is typically based on two- or five-year interest-rate swap rates, unlike in most parts of the world, where such loans are often funded through borrowing that runs for decades. The swap rate is the fixed annual interest rate a borrower pays instead of being exposed to a variable rate.
The Bank of England estimated in July that more than 5 million households would see their mortgage payments increase by the end of 2028, more than 1 million above its previous estimate before the outbreak of the US-Iran conflict.
The two-year swap rate in the UK rose by 27 basis points over the past month to 4.68%, while British banks widely withdrew residential mortgage offers with rates below 5%.
Higher rates spread to global markets
In the United States, the rate on 30-year fixed-rate mortgages has jumped by more than 100 basis points since the outbreak of the war, reaching 7.28% this week, its highest level in about three years and adding to pressure on first-time homebuyers.
In the eurozone, interest rates on fixed-rate mortgages with terms of 10 years or more rose by 8 basis points in August to 3.43%. The sharp rise in government bond yields across the region in recent weeks is also adding upward pressure to mortgage costs.
In Australia, the housing market has begun to weaken as demand falls, with home prices declining for a sixth consecutive month in September.
UK mortgage approvals decline
Data released this week showed the lowest number of weekly mortgage approvals in the UK since the end of 2023, indicating the impact of higher borrowing costs on demand.
Ashley Webb, senior UK economist at Capital Economics, said he still expected UK house prices to rise by 2.5% in 2027, supported by a shortage of homes available for sale.
The possibility of increased government borrowing to finance the new Burnham government's first budget could add to pressure on borrowing costs and “limit the housing market's recovery.”
The new Burnham government's first budget is due to be announced on October 28.
