Why lifting two-child benefit limit could lead to rate hikes

The UK government will address child poverty head on by lifting the two-child benefit cap in the upcoming autumn budget, according to reports. However, the economic impact of this policy change could have significant implications for mortgage rates. 

The two-child benefit cap, introduced in 2017, currently prevents most families from claiming means-tested benefits for any third or subsequent children born after April 2017. According to government figures, the cap affected 1.7 million children in England, Wales, and Scotland last year, and scrapping it would cost about £3.5 billion a year. The Resolution Foundation think tank and others have argued that removing the cap would be the single quickest way to lift hundreds of thousands of children out of poverty. 

Government officials, however, are said to be wary of the cost of this change and its own ability to offset such an outlay. Reports suggest this could be done by raising taxes on high stakes online gambling, but critics believe this is already baked into the numbers.  

Chancellor Rachel Reeves is under pressure to address a supposed £35 million black hole in the budget and bond traders remain unconvinced that the Labour Party can rein in spending and deliver on their vow of fiscal prudence. 

Why does this matter for mortgage rates? 

1. Increased government borrowing 
   Lifting the cap would require significant new government spending, estimated at £3.5bn annually. If not offset by higher taxes or spending cuts elsewhere, this would mean more government borrowing. 

2. Impact on gilts and investor confidence 
   The UK government borrows money by issuing gilts (government bonds). When borrowing rises, investors may become concerned about the UK’s fiscal discipline and demand higher returns to compensate for the increased risk. This pushes up gilt yields (the interest rate the government pays to borrow money). Recent developments have underscored these concerns. Jitters are starting to show in the UK government debt market, amid economic uncertainty ahead of the budget. An auction of nine-year UK bonds this week saw weaker demand, following lacklustre sales of five and 30-year bonds earlier in the week. Long-term borrowing costs have also risen, with the yields on 10 and 30-year debt moving higher.  

3. Transmission to mortgage rates
   Mortgage rates in the UK are closely linked to gilt yields, especially for fixed-rate products. When gilt yields rise, so do the funding costs for banks and mortgage lenders. These higher costs are typically passed on to consumers in the form of higher mortgage rates. In short: more government borrowing could translate to higher gilt yields and higher mortgage rates. 

What Should Mortgage Brokers Watch For? 

Louis Mason, mortgage adviser at Oportflio, warned that the £3.5bn annual cost could unsettle markets.

“The estimated £3.5bn annual cost is significant, and if investors start to doubt the government’s ability to balance the books, gilt yields could rise… In practical terms, that means any policy designed to alleviate pressure on low-income families could ironically make mortgages more expensive for everyone.”

Anthony Emmerson, director at Trinity Financial, stressed the risks of adding to the deficit.

“This is not the time to be considering adding to the deficit we already face… We already have a £20–50 billion black hole and some of the highest borrowing costs in Europe – this decision could compound that problem.”

Jeni Browne, director at Mortgage Finance Brokers, pointed to the mixed impact on families.

“At £17.25 per child per week, the increase could make a huge impact for families on lower incomes,” she said. “But around 30% of households with a mortgage or rent also receive child benefit – so while they may gain on one hand, they risk paying more through higher mortgage costs or rents.”

• Announcements in the autumn Budget: The details of how the cap is lifted, and how the government plans to pay for it, will be crucial.
• Movements in gilt yields: Rising yields could be an early warning sign of higher mortgage rates ahead. 
• Market sentiment: If investors lose confidence in the government’s fiscal plans, both gilts and the pound could come under pressure, further increasing borrowing costs. 

This article was updated on 1 October 2025 to include additional comments from Louis Mason, Oportflio, Anthony Emmerson, Trinity Financial, and Jeni Browne, Mortgage Finance Brokers.