Rising government borrowing costs are putting renewed upward pressure on UK mortgage rates as concerns over inflation and the Middle East conflict unsettle global bond markets, according to Knight Frank.
Tom Bill (main picture, inset), head of residential research at Knight Frank, warns that the yield on 10-year UK government debt has climbed above 5.2% this week, compared with just under 4.8% in the US.
Government borrowing costs have risen across developed economies as investors assess the inflationary impact of the Middle East conflict alongside concerns over high levels of public debt.
However, the UK has faced additional scrutiny because of the government’s limited fiscal headroom, with Bloomberg reporting that the Chancellor’s financial buffer has fallen from £24bn to £12bn.
MORTGAGE PRESSURE
Bill warns the move in bond markets is “not a good signal for mortgage rates”, with expectations that inflation will remain higher for longer already feeding through into borrowing costs.
The impact is beginning to become visible in mortgage market activity.
Mortgage approvals for house purchase fell to their lowest level since January 2024 in July, with Knight Frank attributing much of the decline to the increase in borrowing costs since the Middle East conflict began.
Writing in his weekly Residential Outlook Bill said: “Media coverage of the bond market has moved from the business pages to the front pages in recent days, which is rarely a good sign.
“Government borrowing costs have risen across developed countries as investors become concerned about inflation risks and debt burdens against the backdrop of the Middle East conflict.”
Despite the deterioration in mortgage affordability, housing market activity has so far remained relatively resilient.
HMRC figures show transactions in July were just 1% lower than a year earlier and 4% above the same month in 2024.
RELATIVE CALM
Bill believes one factor supporting activity has been the relative absence of speculation about possible tax rises ahead of the government’s Budget on 28 October.
This contrasts with the uncertainty that preceded the previous two autumn Budgets and has allowed both cash and mortgaged buyers to progress with transactions.
He added: “The relative calm has enabled both cash buyers and mortgage holders to activate their plans as mortgage rates have steadied, at least before the upwards pressure increased this week.”
Knight Frank’s own data also points to resilience at the higher end of the London housing market, with transactions across prime central and prime outer London during the three months to August running 2% above their five-year average.
However, Bill warns that the outlook for buyers will increasingly depend on developments in bond markets and whether higher borrowing costs persist in the run-up to the Budget.
