00:00What influences fixed rate mortgages in the UK? There are two key concepts to understand.
00:05The first is bond yields and the second is something called Sonya swap rates and I'm going
00:10to explain both in a bit more detail now. The UK government generally spends more than they raise
00:16in tax so they borrow money to fill the gap, usually by selling bonds to investors. UK government
00:22bonds are normally considered very safe with little risk that the money will not be repaid
00:27and they're mainly bought by financial institutions such as pension funds. The percentage return known
00:33as the yield on government bonds has been going up since around August 2024. Bond yields reflect the
00:39cost of UK government borrowing and these have increased recently with the yield on a 30-year
00:44bond hitting its highest level since 1998 while a 10-year bond rose to its highest level since 2008
00:51meaning it costs more for the government to borrow money over the long term. The rise in bond yields
00:56tends to lead to rising fixed mortgage rates because they're very responsive to changes in
01:01interest rate expectations. Bond yields influence the mortgage market through something called
01:06Sonya swap rates. Sonya stands for the sterling overnight index average and swap rates are the
01:12rates that the banks will lend money to each other at and reflect lenders expectations of future interest
01:17rates. They play a critical role in how fixed rate mortgages are priced. When bond yields rise, swap rates
01:23tend to rise too, which increases the cost of funding for mortgage lenders, putting pressure on them to
01:28increase mortgage rates for home buyers who are refinancing and first-time buyers trying to get on
01:33the property ladder. As you can see from the graph, swap rates have been mostly trending upwards since
01:39mid-December 2024, which is bad news for borrowers as fixed rate mortgages are likely to stay high at least
01:46in the short term. So why are bond yields and swap rates rising? There are a few contributing factors to the
01:51increase. The first is that in the UK there are concerns about the economy underperforming as it shrunk for
01:58two months in a row and inflation remains stubborn with the latest data showing the inflation rate at 2.5% in
02:05December 2024, which is above the Bank of England's 2% target. The second point is that the UK government budget
02:13that was announced in October last year had a big impact too because of the likelihood of increased government
02:18spending, which has inflationary pressures. And as a result, the Bank of England might not be able to
02:24cut the base interest rate as quickly as they hoped. And the third point is the US election and global bond
02:30yield contagion. Almost everywhere right now, government bond yields are rising. In the US, Japan and Germany,
02:36we've seen bond yields climbing too. There is a great deal of uncertainty about what will happen when the
02:42president-elect Donald Trump returns to the White House this month. He has pledged to bring in tariffs on
02:47goods entering the US and to cut taxes. And investors worry that this will lead to inflation being more
02:54persistent than previously thought.
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