Build1 publisher2 min readPublished
Two-year swap rates are pushing up the cost of funding UK fixed mortgages
Britain's two-year SONIA swap rose 27 basis points in a month to 4.68%, a move a broker says adds about a third of a point to fixed-mortgage funding. Those swaps, more than the 30-year gilt hovering near 6%, set what UK borrowers pay when cheap fixes expire.
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What happened
- The yield on 30-year UK government bonds passed 6% on October 1 for the first time since 1998, then slipped just below that level the next day.
- UK banks withdrew more mortgage offers soon after the war with Iran began than at any point since the 2022 mini-budget crisis under Liz Truss.
- UK mortgage approvals fell to their lowest level since late 2023, according to data published this week.
- Ashley Webb of Capital Economics still forecasts 2.5% UK house price growth in 2027, citing the small number of homes for sale.
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Why it matters
- constraint A retreat in the 30-year gilt would not by itself make UK fixed deals cheaper. Borrowers get relief only when the two- and five-year swaps come down.
- cost The first bill falls on the roughly 750,000 borrowers whose pre-2022 fixes end this year. They face about 170 pounds a month more on average, before the 2027 renewals arrive.
- exposure Borrowers who have not yet locked a rate carry each swap move themselves, because lenders have already pulled offers priced below 5% within days.
The 30-year gilt got the headline. UK fixed mortgages are priced off a shorter curve. A Reuters report, carried in Ukrainian by mezha.net, says most UK fixed rates are set by two-year and five-year swap rates. In the US and much of Europe, fixed mortgages usually track long-term borrowing [5].
Nicholas Mendes, a mortgage manager at broker John Charcol, said higher funding costs push mortgage rates up as banks pass the extra cost on to borrowers [20]. The two-year SONIA swap began the month near 4.41% [1]. Mendes estimates its rise adds roughly a third of a percentage point to the cost of funding a fixed-rate mortgage [7]. Banks cannot cover that from their own funds for long, he said [8]. According to the Ukrainian text, Mendes said the day's changes added to pressure on borrowers that had been building for several weeks [9]. Energy prices pushed up by the war with Iran have added to the pressure on rates [10].
For 2027 renewals, the evidence is one borrower. Richard Merrett, managing director of mortgage firm Alexander Hall, has a five-year fix at 1.14% that ends in early 2027 [11]. His monthly payment is estimated to rise from 550 to 1,650 pounds [12]. That is three times the old payment: 1,100 pounds more a month, or 13,200 pounds a year [2]. Running a mortgage firm did not get him a better exit [11]. Merrett called it a very sharp increase, with monthly payments tripling, and said people would be shocked and forced to cut back on spending [13].
His figure transfers only to households that fixed near 1.14% on a similar balance. The Bank of England's July forecast covers the whole population. It had more than 5 million households paying more by the end of 2028, over a million more than it expected before the Gulf conflict, with a typical rise of 45 pounds a month [14]. Merrett's increase is about 24 times that [3]. In my view the tripling sits at the extreme end of the 2027 renewals. The Bank published its forecast in July, before the past month's swap rise [14][6].
Merrett said borrowers have little room to change what they will pay unless the war with Iran ends and inflation pressure eases [15].
What to watch
- John Healey's first budget as finance minister on October 28, where Capital Economics' Webb says new government borrowing could push lending costs higher and limit the housing recovery [c18].
- Nationwide's next house price reading, after it reported the slowest growth since December 2025 and tied that partly to fears of a Bank of England rate rise [c19].