The bond market sell-off has sparked fresh fears of higher borrowing costs for UK households. We look at what the turmoil in financial markets could mean for your mortgage, pension and savings.

Cost and choice of home loans

Experts think that the pricing on new fixed-rate mortgages could start rising again as a result of the bond market turbulence. That is because lenders get funding for home loans from the money markets.

Fixed mortgage rates are largely influenced by “swap rates” rather than the Bank of England base rate. These wholesale rates can react rapidly to changing inflation expectations and financial market uncertainty.

The spike in UK government borrowing costs has caused swap rates to jump sharply over the past week.

On Thursday, Coventry Building Society was the first notable player to move, warning brokers of its intention to hike fixed-rate deals for new and existing borrowers from Monday. Other lenders are expected to reprice their mortgages in the coming days.

This is Groundhog Day for borrowers, many of whom will feel as if they have been down this road before. But so far, the reaction from lenders has not been on the same scale as in the wake of the Liz Truss government’s disastrous mini budget in 2022, or even this spring, when the outbreak of war in the Middle East caused an economic storm.

But Rachel Springall, a finance expert at the data provider Moneyfacts, says the jump in swap rates does “not bode well for borrowers, as lenders use swap rates as a key influence to reprice their fixed-rate mortgages”.

With the majority of existing mortgage holders on a fixed-rate product, the current situation is a bigger deal if you need to remortgage soon or are trying to buy your first home. On Thursday, the average rate on a new two-year fixed-rate mortgage stood at 5.59%, while the typical rate on a five-year deal was 5.63%. In April these rates were at 5.9% and 5.78% respectively.

David Stirling, an independent financial adviser at Belfast-based Mint Wealth, said: “Coventry won’t be the last, as lenders watch each other like hawks, and once one has repriced, the rest follow within a week purely to avoid being the cheapest rate on the market and getting swamped with applications they can’t fund at that price. 

“My advice to anyone looking to remortgage or purchase right now is simple: lock in your offer of a rate now.”

Pensions

If you are aged under 50 and are saving into a pension, it is unlikely any of your money will be in bonds. It is instead probably going into stock market-based investments, and any short-term fall in the FTSE (it actually rose on Thursday after falling back earlier in the week) could be good news as you will get more shares for your money.

If you are retired, you may have investments in government bonds (gilts) for the income they provide. These investors do not need to worry about changing prices and yields as they will still get the fixed cash payment – called a coupon – as expected. But the current turmoil is potentially a bigger worry for workers approaching retirement.

It is very common for more of members’ pension pots to be moved into gilts as their retirement date gets nearer. If this is the case, and it is now time to sell those gilts, the investor could get less than they bargained for.

“If you are closer to retirement, it’s worth reviewing what you are invested in, especially if you’re in a ‘lifestyling’ strategy that moves you out of equities into bonds the closer you get to retirement,” said Helen Morrissey, head of retirement analysis at the investment platform Hargreaves Lansdown.

For younger workers with perhaps several decades to go until retirement, keep calm and carry on is not a bad message. You will be invested in a pension for a long time and will experience several periods of market turbulence, says Morrissey. “Taking kneejerk actions, such as changing investments or stopping contributions, can potentially make things worse by locking in losses.”

Bear in mind that higher gilt yields should result in lower annuity prices, so anyone planning to trade in their pension for an annuity may not be worse off. (An annuity is a product that converts an individual’s pension pot into a regular, guaranteed income for the rest of their life).

Annuity rates are usually closely linked to 15-year gilt yields, which have this week hit 28-year highs.

Andrew King, pension technical specialist at Evelyn Partners, says a healthy 65-year-old buying a single-life level annuity with a five-year guarantee can now secure just over £8,000 of income with £100,000 in pension savings, compared with well below £5,000 a decade ago.

Savings

The most important thing for savings rates is the Bank of England base rate and where the markets expect it to be in the future.

The money markets expect the Bank of England to leave interest rates on hold at 3.75% at its next policy decision on 17 September. However, the City expects one rate rise before the end of the year, and two more hikes in 2027.

At the moment, the top-paying easy-access savings accounts pay about 4.5% interest or thereabouts.

Sarah Coles, head of personal finance at the investment platform AJ Bell, says the current market gyrations tend to be good news for savings deals as banks usually react by increasing their interest rates. “This particularly affects fixed rate accounts, so we tend to see them move first and fastest.”

“The market is already impressively competitive at the moment, so the reaction may not be particularly dramatic. However, the movements in gilt yields have actually pushed the best five-year fixed [savings] rate over 5%, and we are likely to keep seeing rates nudge up from here.”