Mortgage interest rates are set to rise as financing costs reach their highest level in 27 years

Fixed-rate mortgages look set to rise again after the cost of government borrowing rose to the highest level in more than a quarter of a century.

Interest rates were expected to fall this year on expectations that the Bank of England will cut the base rate three or four times.

But now rising government bond yields have called the mortgage rate cut into question.

The yield on 30-year government bonds reached 5.4 percent today, the highest level since 1998. Meanwhile, the yield on 10-year government bonds rose to 4.88 percent – the highest level since the financial crisis .

This has largely been driven by Labour’s budget plan to borrow and spend more.

This caused difficulties for government bond markets, causing interest rate expectations and government bond yields to rise ever since.

It also impacts Sonia swap rates, which reflect lenders’ expectations of future interest rates and play a crucial role in the pricing of fixed-rate mortgages.

Swaps have been on the rise in the past month, and fixed-rate mortgages have generally yet to follow suit.

On December 6, five-year swaps were 3.8 percent and two-year swaps were 4 percent.

But as of today, five-year swaps have risen to 4.12 percent and two-year swaps to 4.26 percent.

Yesterday alone, five-year swaps rose 0.14 percentage points in one day.

This means that the lowest interest rate mortgages are currently below their equivalent swaps – something that is incredibly rare.

The lowest five-year fixed rate mortgage currently pays 4.07 percent and the lowest two-year fixed rate is 4.16 percent.

Are lenders increasing their mortgage rates?

The picture among lenders has been mixed in recent weeks: some are increasing interest rates, while others are decreasing.

Mark Harris, CEO of mortgage broker SPF Private Clients, said: ‘Since mid-December, swap rates have been on a largely upward trend as the outlook suggests fewer rate cuts this year than previously thought.

‘But despite this, a number of lenders, including Halifax, HSBC and Leeds Building Society, have significantly reduced their fixed rates in their bid to build a pipeline of business for the new year.

‘On the other hand, some lenders have gone in the opposite direction and increased some of their rates, including Skipton, Virgin and Clydesdale, while TSB has increased prices on more products than decreased, and Accord has increased rates as much as it is as is cut.

“Lenders that raise prices may be more sensitive to swap rate increases than larger lenders who have more savings to draw on and can better absorb any swap rate increases.”

Anita Wright, a financial planner at Bolton James, thinks the current situation could make it extremely difficult for the Bank of England to cut interest rates further.

Speaking to Newspage news agency, she said: ‘The UK is trapped in a vicious debt cycle. It is almost impossible to reduce the shortages.

‘The Bank of England clearly cannot control inflation; the increase in the minimum wage and national insurance are passed on to consumers in the form of higher prices.

“The bond market is saying, ‘We’re pretty sure we’re going to see a second wave of inflation come back, similar to the 1970s.’

‘Markets are now demanding higher interest rates to compensate for the inflation risk. It is unlikely that the Bank of England will be able to cut rates in these circumstances and therefore mortgage rates will remain at their current levels at best.”

Stuart Cheetham, CEO of mortgage lender MPowered Mortgages added: ‘Continued market uncertainty leads to volatility in swap rates, which inevitably has a knock-on effect on mortgage rates.

“Swap rates have risen since the start of the year and while some lenders, including us, have cut mortgage rates, these cuts are likely to be short-lived.

‘Until market confidence improves, swap markets will continue to witness volatility and high mortgage rates are expected to persist.’