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Soaring bond yields set to lift UK mortgage rates

Mortgage borrowers will face a surge in refinancing costs next week after the chancellor’s mini-Budget sent government bond yields soaring, compounding the effect of yesterday’s Bank of England rate rise, brokers warned.

Bond traders responded to Kwasi Kwarteng’s tax and spending plans on Friday by sending two-year gilt yields up 36 basis points to 3.87 per cent and those on 10-year gilts up 23 basis points to 3.72 per cent.

Ray Boulger, senior mortgage technical manager at broker John Charcol, said the bond moves would have “a big impact” on the mortgage market. Shifts in gilts typically feed through into swap rates, which lenders use to guide their mortgage pricing decisions.

On Friday, Boulger warned colleagues to nail down as soon as possible any fixed-rate deals that were pending for clients.

“I can see some lenders either pulling their deals or increasing their rates as early as today,” he said. Some lenders might even withdraw their rate deals for a few days, he added, as they wait for the bond market to settle.

The moves will intensify the pressures already bearing down on borrowers this week, after some lenders raised their home loan rates and withdrew deals ahead of a 0.5 percentage point rise in the BoE’s main interest rate.

Santander raised fixed rates by up to 0.8 percentage points on its mortgages on Wednesday, while NatWest added 0.35 percentage points to its two- and five-year fixed-rate deals for purchases, and 0.2 percentage points on the same deals for remortgage customers.

Platform, the arm of the Co-operative Bank for lending via mortgage brokers, withdrew all of its rate deals on Thursday. Coventry Building Society said it would pull all of its deals available to borrowers with a loan-to-value ratio under 85 per cent on Friday, and all of its three-year fixed-rate deals.

Bond market pricing is not the only reason for lenders to raise interest rates and cull deals. Andrew Montlake, managing director at broker Coreco, said lenders who were concerned about their ability to respond to a surge in customers often used rates to choke off demand.

“They can’t afford to be left at the top of the ‘best buy’ charts. They have to reprice otherwise they just get inundated and can’t protect their service levels,” he said. In the current environment, he added, lenders were likely to put their prices up by substantial margins of about 0.5 percentage points.

“We’re in for a bumpy week,” said Simon Gammon, managing partner at broker Knight Frank Finance. “If the last few months are anything to go by, the notice that mortgage brokers have been given that a rate is being withdrawn is hours, not days.”

A rise of half a percentage point on the current average standard variable rate — typically the most expensive type of mortgage lending — of 5.4 per cent would add about £1,443 to total repayments over two years, according to finance site Moneyfacts.

Three-quarters (74 per cent) of mortgage borrowers are protected from the immediate consequences of rate rises by being on a fixed-rate deal, according to the Financial Conduct Authority, though half of these are due to expire within the next two years.

“Many of the biggest lenders’ cheapest deals are well over 4 per cent but it does not seem like it will be long before they are closer to 5 per cent,” said Aaron Strutt, technical director at broker Trinity Financial.

Additional reporting by Keith Fray

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