Why Are UK Mortgage Rates Still HIGH In 2025? Will Mortgage Rates Go Down?

Matt | Personal Finance

Despite the Bank of England cutting the base interest rate in 2024 and in 2025, UK mortgage rates remain high! What’s going on?   In this Short, we look at the key reasons keeping mortgage rates high including Bond Yields and SONIA Swap Rates   We also look at whether mortgage rates will go down, remain the same or go up in 2025   #mortgage #mortgagerates #homeownership #home #property #flat #firsttimebuyer #movinghome

Transcript

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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