Reeves budget pivotal as UK prepares to issue more gilts than first expected
The UK government is now expected to raise an additional £9 billion through bond sales in 2025, upping the stakes for the mortgage market and interest rates as Rachel Reeves' budget looms.
A median estimate of 14 primary dealers surveyed by Bloomberg revealed that the government’s planned gilt issuance is now expected to hit £308.1 billion, likely bringing sales to their highest annual level for four years.
That could have big implications for mortgage rates as financial markets await Reeves' plan to get the economy back on track.
The increased borrowing requirement puts Reeves in a precarious position ahead of her November 26 budget announcement – a date that will largely determine market sentiment and, by extension, borrowing costs across the economy.
Why government bond issuance matters for mortgage rates
The pressure is mounting because government borrowing directly influences mortgage pricing. When the UK needs to borrow more, it typically has to offer higher returns to attract investors, pushing up gilt yields and creating a ripple effect through the mortgage market.
Recent weeks have shown just how reactive financial markets are to budget signals. When Reeves signalled a potential shift away from income tax increases, gilt yields jumped sharply – a move that reminded everyone how sensitive this market has become.
Borrowers and brokers should expect similar volatility in the days and weeks surrounding the budget announcement. Any hint that the government's fiscal plan lacks credibility could trigger another bond market sell-off, translating quickly into higher mortgage rates.
Mortgage industry meets other challenges
The mortgage market faces a deeper problem than gilt yields alone. Critics of the government say that over the past year, repeated and contradictory moves on property taxation have created a state of near paralysis.
Sudden changes to stamp duty, rollbacks of thresholds, leaked proposals about National Insurance on rental income, and persistent hints of taxes on high-value homes have combined to stall activity across multiple market segments.
Some brokers say policy unpredictability is now disrupting transactions as much as interest rate movements.
Mortgage 1st’s Jon Stones told Mortgage Introducer that cumulative uncertainty was having a “big impact on pipelines,” frequently leading to delays as clients weigh up their options.
Craig Head at Mortgage Required, meanwhile, said “the goalposts are moving so often" in the current market that dispensing long-term advice is no easy task. "We can deal with higher rates," he said, "but what is very difficult to deal with is uncertainty."
The upcoming budget could either resolve this uncertainty or intensify it. If National Insurance on rental income is formally introduced, buy-to-let affordability may tighten further.
The critical question is whether Reeves' budget will reassure or alarm investors, an outcome that will prove crucial in the direction of the UK mortgage market in the months ahead.
The bearish case: If investors believe the government isn't doing enough to stabilize public finances, gilt yields could rise further. Higher government borrowing costs would flow through to mortgage lenders, who would pass increases on to borrowers. In this scenario, mortgage rates could face renewed upward pressure.
The bullish case: If the budget is seen as credible and contains meaningful fiscal consolidation, it creates room for the Bank of England to cut interest rates faster than currently expected. A combination of lower base rates and stable gilt yields could actually lead to more favorable mortgage rates despite the higher borrowing.
In short, what does that mean for mortgage brokers? The budget announcement will likely trigger immediate market moves, followed by a period of digestion and reassessment from lenders.
Some observers suggest the government could partially offset the impact by canceling previously scheduled bond auctions – a move that would reduce overall supply pressure on the market. If executed, that could help stabilize gilt yields and prevent the worst-case scenario for mortgage rates.
All eyes are on Downing Street as markets – and mortgage industry members - anxiously await the outcome of next Wednesday’s announcement.
