Mortgage rates are moving higher again as rising government borrowing costs create fresh uncertainty across the financial markets.

Yields on both 10-year and 30-year UK government bonds—known as gilts—have risen sharply. At the same time, several major mortgage lenders, including Barclays, Halifax, TSB and Principality Building Society, have increased selected fixed mortgage rates.

This is an important reminder that fixed mortgage rates can rise even when the Bank of England has not changed Bank Rate.

What are gilt yields?

Gilts are bonds issued by the UK Government when it needs to borrow money. Investors lend money to the Government in return for a fixed level of interest over an agreed period.

The yield represents the return an investor receives for holding that bond.

Bond prices and yields move in opposite directions. When investors sell gilts or become less willing to buy them, their price falls and the yield rises.

In simple terms, a rising gilt yield means investors are demanding a higher return before they will lend money to the Government.

Why are gilt yields rising?

There can be several reasons.

Ahead of the Autumn Budget, investors will be considering how much the Government intends to borrow and whether its tax and spending plans are sustainable.

If the Government needs to issue more debt, there will be a greater supply of gilts for investors to buy. Investors may demand a higher return, particularly if they are concerned about inflation, economic growth or the overall level of government borrowing.

Gilt yields can also rise when markets believe interest rates may remain higher for longer. If investors expect future interest rates to be higher, older bonds paying lower rates become less attractive.

The main factors currently influencing the market include:

• Concerns about the level of government borrowing

• Uncertainty ahead of the Autumn Budget

• Inflation remaining above the Bank of England’s target

• Expectations that interest rates could stay higher for longer

• Investors demanding a greater return for lending over longer periods

Jason Hollands, managing director of Bestinvest, said that 30-year gilt yields were approaching 6%, while 10-year yields had reached approximately 5.5%—levels not seen for decades.

Higher government borrowing costs also reduce the Chancellor’s room for manoeuvre because more public money must be used to service the national debt.

How do gilt yields affect mortgage rates?

Gilt yields do not directly determine the mortgage rate offered to an individual borrower.

Fixed mortgage rates are more closely connected to swap rates, which lenders use to manage the cost and risk of offering fixed-rate mortgages. However, gilt yields and swap rates are influenced by many of the same economic factors and often move in a similar direction.

When markets expect interest rates or inflation to remain higher, swap rates and lenders’ wholesale funding costs can increase. Lenders may then withdraw existing mortgage products and replace them with more expensive ones.

Other factors also affect mortgage pricing, including competition between lenders, lending targets, service levels and how much business a lender wants to attract.

This means mortgage rates will not always move immediately or by the same amount. Nevertheless, a sustained rise in gilt yields and wholesale funding costs usually creates upward pressure on fixed mortgage pricing.

Which lenders have increased their rates?

TSB has increased a selection of residential and buy-to-let product transfer and additional borrowing rates. Some one-year fixed rates have risen by 0.30%, while selected two-, three- and five-year rates have also increased.

Barclays has increased mortgage rates for the second time within a week. Selected purchase, remortgage, large-loan and existing-customer rates have risen, including increases across products at 60%, 75%, 90% and 95% loan-to-value.

One of its fee-free Great Escape remortgage products has increased from 5.34% to 5.55%.

Principality Building Society has announced a mixture of changes. Although it has reduced a small number of rates, selected residential, buy-to-let, new-build, holiday-let and Help to Buy Wales products have increased.

Halifax has also increased selected homemover, first-time buyer, remortgage, product transfer and further advance rates by as much as 0.15%.

These changes demonstrate how quickly the mortgage market can move when lenders’ funding costs increase.

What should mortgage borrowers do?

If your current mortgage deal ends within the next six months, it would be sensible to review your options now rather than waiting until the final few weeks.

Depending on the lender, it may be possible to secure a new mortgage several months before your current deal finishes. If the market improves before completion, the available options can sometimes be reviewed again.

Starting early does not necessarily mean committing immediately. It gives you more time to understand the available products, prepare your application and avoid being forced into a decision if rates continue to rise.

You should also consider the overall cost of a mortgage rather than looking only at the headline interest rate. Arrangement fees, valuation costs, legal incentives and early repayment charges can all affect which product offers the best value.

Is your mortgage due for review?

If your mortgage deal ends within the next six months, or you are planning to buy or remortgage, get in touch with Chetwood Lloyd Mortgages.

We can review the options available from more than 100 lenders and explain everything clearly and in plain English. Our mortgage advice is independent and fee-free.

Acting early could give you more choice and protect you from further rate increases while still allowing the position to be reviewed if the market improves.

Your home may be repossessed if you do not keep up repayments on your mortgage.