As all long-term lenders price their mortgages with reference to the price of gilts – or units of government debt – mortgage rates are now rising as the cost of gilts rise. Since October, as the Conservative lead over Labour has diminished, gilt yields have increased by over 0.5%. City research suggests that gilt yields will have to rise by a further 0.75% to about 4.75% in the event of a hung parliament – higher if inflation returns as a serious threat. This will mean lenders could raise mortgage rates by 0.75%.
Jonathan Moore, director of easyroommate.co.uk, said: “Mortgages rates are linked to the wider financial market. If the wholesale financial market is concerned that a hung parliament cannot cut the deficit, and that inflation will rise, yields on gilts will rise – pushing up the cost of mortgages. A rise of three quarters of a per cent in gilt yields is a conservative estimate of the impact of a weak or hung parliament.”
If gilt rates went up by just three-quarters of a per cent, and mortgage rates rose accordingly, higher mortgage rates would cost families an extra £624 next year on a new £118,000 mortgage – the average according to the latest CML figures – or £52-a-month on a repayment mortgage. This is the equivalent of raising income tax by three points to 23% for someone earning the UK average wage of £25,800.
“Not cutting the deficit might defer painful tax and spend decisions, but voters will end up paying for it on their mortgage” said Moore. “If we don’t deal with the debt crisis we’ll have bigger mortgage bills for families.”
The chances of a hung parliament have been steadily increasing since October as the Conservative lead in the polls has declined. At March 24th, the Conservative lead over Labour was reduced to just 2% – from 13% at the start of October. The odds on a hung parliament have now dropped to 6/4.