Mortgage rates and borrowing costs under pressure
Experts warn that new fixed‑rate mortgages may start to climb again as bond‑market volatility tightens funding costs for lenders. Fixed mortgage pricing is driven largely by swap rates rather than the Bank of England base rate, and these wholesale rates can swing quickly when inflation expectations shift or markets become uncertain.
The surge in UK government borrowing costs has pushed swap rates higher this week, prompting Coventry Building Society to announce rate hikes for new and existing borrowers from Monday. Other lenders are likely to follow suit in the coming days.
This repeat of past rate spikes feels familiar to borrowers, though the current reaction is not yet as severe as after the 2022 mini‑budget or the spring Middle‑East conflict. Finance expert Rachel Springall of Moneyfacts notes that rising swap rates “do not bode well for borrowers, as lenders use them as a key influence to reprice fixed‑rate mortgages”.
Current average rates illustrate the pressure: a two‑year fixed mortgage sits at 5.59% and a five‑year at 5.63%, down from 5.9% and 5.78% in April. David Stirling, an independent financial adviser at Mint Wealth, advises anyone looking to remortgage or buy now to lock in a rate while available.
Pensions and retirement income
For those under 50, pension savings are usually equity‑focused rather than bond‑linked, so short‑term market dips can actually be advantageous by allowing the purchase of more shares. Retirees holding government bonds (gilts) receive fixed coupon payments and are largely insulated from price swings.
However, workers nearing retirement often shift larger portions of their pots into gilts. If those bonds must be sold now, investors could receive less than expected, warns Helen Morrissey of Hargreaves Lansdown. She recommends reviewing lifestyling strategies as retirement approaches.
Younger workers with decades left to save should stay the course; market turbulence is normal and knee‑jerk changes can lock in losses. Higher gilt yields also tend to lower annuity prices, meaning those planning to buy an annuity may benefit. Single‑life level annuities with a five‑year guarantee now can deliver over £8,000 a year on a £100,000 pot, compared with below £5,000 a decade ago, according to Andrew King of Evelyn Partners.
Impact on savings rates
Easy‑access savings accounts currently offer around 4.5% interest, reflecting the Bank of England base rate and market expectations for future policy. The money markets anticipate the Bank will hold rates at 3.75% on 17 September, though the City expects one more hike before year‑end and two more in 2027.
Market volatility often spurs banks to raise rates, especially on fixed‑rate products, notes Sarah Coles of AJ Bell. While competition is already fierce, gilt‑yield movements have pushed the best five‑year fixed savings rate above 5%, and further incremental rises are likely.