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Some 700,000 British households face a jump in mortgage costs when their fixed-rate deals end in 2025, as upheaval in the UK financial markets over recent weeks threatens to drive borrowing costs higher.
Mortgage rates had been projected to fall this year, easing the pain for homeowners. But the recent sell-off in the UK government debt markets, driven by worries over persistent inflation and heavy public borrowing, could keep borrowing costs higher for longer.
That shift has also caused swap rates, which are closely tracked by lenders to price their mortgages, to rise sharply.
Two-year sterling interest rate swaps, which anticipate the average interest rate over 24 months, have risen from just under 4 per cent in mid-September to more than 4.5 per cent.
The mortgage shock awaiting families this year comes on top of the 2.4mn households that had to remortgage at higher rates in 2023 and 2024, according to analysis by property group Savills.
Lucian Cook, head of residential research at Savills, said the “pressure on household finances” from rising mortgage costs “has the impact of continuing to suck money out of the economy”.
The vast majority of UK homeowners fix their mortgage rate for two or five years, meaning the shock of the big rise in borrowing costs that started in 2022 — and ramped up after Liz Truss’s disastrous “mini-Budget” — has hit households over several years.
Rising mortgage payments have been a key contributor to the cost of living crisis. Higher interest rates will add £1.27bn to the annual housing costs for property owners remortgaging in 2025, Savills projects.
These estimates are based on forecasts that predict remortgage rates will fall to 4.0 per cent by the end of the year.
But investors have grown increasingly concerned about government debt, sticky inflation and the prospects for the UK economy, which over the past few weeks has driven up government borrowing costs and swap rates.
Simon Gammon, managing partner at Knight Frank Finance, said: “Swaps have moved materially so pricing pressure is already there for all lenders . . . if the current trend continues with swaps remaining high, we will probably see mortgage rates move higher across the board.”
The Bank of England, which last year started to cut its benchmark interest rate from a 16-year high, has warned that the “full impact of higher interest rates has not yet passed through to all mortgagors”.
The central bank said in November that the typical owner-occupier reaching the end of a fixed rate in the next two years would see their monthly payments increase 22 per cent, or £146.
The share of households who are behind or heavily burdened by mortgage payments remains low by historical standards, the BoE added.
The need to absorb higher costs has led many homeowners to put off moving house, with fewer people able to trade up to a more expensive home.
Cook at Savills said that “only when this has fully washed through . . . will you see people think again about moving”.
There should be some good news for borrowers remortgaging two-year fixed deals, however. They fixed at close to the recent peak of borrowing costs and will largely see their monthly costs fall.
Of the just over 1mn fixed-rate deals ending in 2025, some 340,000 will be two-year fixes where borrowers will typically save money by remortgaging. The rest were longer fixes where remortgaging would be more expensive, Savills said.
Additional reporting by Ian Smith
https://www.ft.com/content/9f2ac95e-2235-4ecd-8fcf-3f0558a5b792
