‘Kick in the teeth’ rates set to hurt homeowners and first-time buyers

 (Matt Writtle)
(Matt Writtle)

First-time buyers and existing homeowners searching for mortgages were warned of a “kick in the teeth today” on fears that fixed rates are certain to rise over the coming weeks following a spike in gilt yields.

The returns on British Government bonds — gilts, which are closely linked to fixed rates offered by banks and building societies — has been rising steadily on fears that the Bank of England will have to keep interest rates “higher for longer” than previously anticipated.Yesterday, when the inflation rate fell only to 8.7%, yields surged again to levels not seen since the aftermath of Kwasi Kwarteng’s ill fated mini-Budget last September

Today the yield on the two-year gilt was up another nine basis points at 4.46% while the five-year yield was 10bps higher at 4.24%. The bond markets continued to price in Bank of England rate rises up to 5.5% by the year end.

Mortgage experts today said the latest bout of turbulence in the gilts markets would flow through “pretty quickly” to mortgage pricing.Ray Boulger, senior mortgage technical manager at broker John Charcol, said: ”It will take a couple of weeks for the market to react but by then I don’t see any two-year fixes below 5%. Swap rates are just under 5% now and you have to allow for the lender making a margin. I would see five-year fixes between 4.5% and 5%.

“This is going to have a negative impact on the housing market, stress tests mean the amounts people are going to be able to borrow will be reduced,” he said.

“The recovery in the property market that some people are suggesting is probably not going to happen. I don’t think we’ll see a collapse in prices but I think we’ll see then drift downwards.”

Sarah Coles, head of personal finance, at fund manager Hargreaves Lansdown, said that people hunting for a mortgage would get a “kick in the teeth”.

She added: “If you’re looking for a fixed-rate mortgage right now, this is horrible timing, because the market is likely to be running hot in the short term. There is the hope that over time, this proves to be a spike, but there are no guarantees.

“It leaves you with the option of fixing at a higher rate than planned, opting for a variable rate in the hope fixes will come down, or holding off until the picture is clearer,” she said. “None of these are ideal – and none are brilliant indicators for the property market either.”

The warning came as latest research from lender Nationwide showed that 74% of people are worried about their personal finances and ability to cover essential costs.

This represents the highest level this year and 4% up on the previous high of 70% in February.Londoners are most stretched with 81% concerned.