UK mortgage borrowers face higher borrowing costs after a global bond sell-off pushed swap rates to their highest level in three years, lenders and analysts warned.
The five-year swap rate, which reflects the interest rates banks charge each other and heavily influences fixed-term mortgage pricing, rose above 4.52% — its highest since October 2023. Lenders are expected to pass the increase through to consumers as they seek to preserve loan-book margins and manage risk.
Russ Mould, investment director at the London Stock Exchange Group, 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."
The sell-off in UK government bonds also sent the yield on 10-year gilts to its highest level since 2008 before retreating somewhat following a drop in oil prices. Oil has been a key driver of the bond market turmoil, with elevated energy costs fueling inflationary pressures that could compel central banks to maintain or raise interest rates.
Tom Simpson, managing director of homes at Yorkshire Building Society, told BBC Radio 4's Today Programme that all things being equal, a "modest increase" in mortgage rates would be expected given current moves in the swaps market. He noted that the recent shift was far less severe than the volatility seen at the start of the Iran war in March, when swaps rose by 0.5 percentage points over just 10 days compared with the 0.1 percentage point increase registered over the past week.
The anticipated rise in borrowing costs comes as a blow to Greater Manchester mayor Andy Burnham's efforts to ease cost-of-living pressures across the region.
Market participants will also be watching a crowded agenda for economic data releases, including August services PMI reports from the Eurozone and the UK, US job-cut figures from Challenger, and a US services PMI reading.
