Gilt yields and energy import dependency are driving sharper rate increases for British borrowers
UK homeowners are bearing a heavier mortgage burden than those in the United States or continental Europe as the Middle East conflict continues to push energy prices higher and fuel inflation fears.
Since the conflict began in late February, the average two-year fixed rate in the UK has climbed 0.91 percentage points to 5.75%, according to Moneyfacts. On a £200,000 repayment mortgage over 25 years, that equates to an additional £107 per month, taking monthly repayments to £1,258.
The increases elsewhere have been more modest. The average 30-year fixed rate in the US — the most common product in that market — rose just 0.38 percentage points to 6.36%. In Germany, mortgage rates increased by approximately 0.3 percentage points, as reported by the Financial Times.
Analysts attribute the UK's sharper rate movement to its greater dependence on imported oil and gas, which makes it more susceptible to inflation driven by energy price rises.
Ten-year gilt yields have risen 0.6 percentage points to 5.18% since the start of the year, a more pronounced increase than equivalent government bond yields in the US (up 0.42 percentage points), Germany (0.31 percentage points) and France (0.26 percentage points).
"Mortgage rates and bond yields are responding to the same underlying driver — a sharp rise in inflation expectations linked to higher energy prices from the Middle East war," said Richard Carter (pictured right), wealth manager at Quilter Cheviot.
"The UK has been hit harder than some of its peers because it is particularly exposed to imported inflation, so rises in oil and gas prices feed through more quickly," said Richard Carter, wealth manager at Quilter Cheviot. "That has pushed gilt yields up more sharply, with investors also sensitive to factors including political uncertainty and the prospect of higher government borrowing and the watering down of fiscal rules in the event of a change in the prime minister."
The consumer prices index showed inflation at 3.3% in the year to March, above the Bank of England's 2% target and up from 3% in February. April figures are due to be published on Wednesday.
The structural characteristics of the UK mortgage market amplify borrowers' exposure to rate movements. The vast majority of new home loans — 92.4% in the final quarter of last year — were fixed-rate products of up to five years, the highest proportion of any major European country except the Czech Republic, according to the European Mortgage Federation. By contrast, borrowers in Denmark, France, Germany, the Netherlands, Spain and the US typically hold longer-term fixed-rate products, which provide greater insulation against rate fluctuations.
UK Finance estimates that 1.8 million fixed-rate deals are set to expire this year, with approximately half originated in 2021 when rates were at historic lows.
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