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Surge in gilt yields heralds increases for fixed mortgages, economists warn

Economists believe fixed rate mortgages will begin to rise across the board over the coming months after a surge in gilt yields.

Gilt yields are closely linked to the price of swap rates, which are key determiners in the price of fixed rate mortgages.

At the beginning of this week, two, five and 10-year gilt yields were 0.49 per cent, 1.72 per cent and 2.94 per cent, respectively. However, they have increased a respective 0.15 per cent, 0.34 per cent and 0.47 per cent in the past month alone.

A similar picture can be seen in the swaps markets, with five-year swaps in particular showing huge increases in the past two months. After settling at 1.34 per cent in mid-July, five-year swaps rocketed to 1.94 per cent as at 6 September.

The surge in five-year swaps forced Yorkshire Building Society to last week increase the rates on two of its keenest-prices five-year fixed rates, the cheapest of which increased from 2.49 per cent to 2.59 per cent.

The Bank of England last month launched “forward guidance”, which said base rate would not rise beyond its current record-low level of 0.5 per cent until unemployment has fallen below 7 per cent or inflation spikes.

ING Direct senior economist James Knightley says rates will not rise dramatically but he expects rate rises within the coming months.

He says: “The problem for the Bank of England at the moment is that while households appear to believe in the forward guidance and seem relaxed about interest-rates, the markets just don’t believe it.

“Mortgage rates are pretty much at the bottom now and we’re probably going to start seeing these push up over the coming months as external influences play their part on lenders’ funding. I don’t anticipate an aggressive move given that most of the data has been at the longer end of the curve but we will see rates push up.”

Economist Gary Styles believes the impact on rates is most likely to be seen on longer-term fixed rates, which have seen the largest increases in gilt yields and swap rates.

Styles says: “I think there will be a definite upward pressure on mortgage rates, particularly on longer-term fixes but we need to monitor all economic data and not just the stats that paint a rosy picture.”

Lentune Mortgage Consultancy managing director Stuart Gregory says: ”The rates that we have seen in the last eight to nine months have supported FLS in terms of lenders borrowing from the government at these lower rates but if we then go back to the money markets for funding fixed rate prices, that could be a concern.

“When that happens, there may be borrowers who followed the Bank of England’s guidance and have decided to stay as they are for a bit longer and when they come to review their position they my find that lenders have raised their rates to stem the flow of business.”

 

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