Industry insider explains what the sharp rise in long-term government borrowing costs means for rates and clients
Thirty-year gilt yields have climbed to their highest levels in decades, raising questions about its immediate impact on mortgage rates and the options available to borrowers and brokers.
“The rise in 30-year gilt yields does feed into mortgage pricing, but mainly at the long end of the market,” said Nicholas Mendes (pictured top), mortgage technical manager at London broker John Charcol. “Gilt yields and swap rates move together, and lenders use swaps as the basis for fixed-rate products.”
The sharp increase in long-term government borrowing costs has driven a notable divergence between short- and long-term fixed-rate mortgage pricing. While two- and five-year Sonia swap rates—key benchmarks for lenders—have dropped, both are below levels seen a year ago.
“Right now, two- and five-year swaps are at 3.73% and 3.83%, lower than this time last year, and that has allowed shorter fixes to improve from last autumn’s highs,” Mendes said.
However, the picture is markedly different for longer durations. Long-dated swaps have risen in step with 30-year gilts, making 10-year and longer fixed-rate mortgages more expensive for borrowers.
“The 10-year swap is now 4.19% and the 30-year is 4.73%, both well above a year ago,” Mendes noted. “That makes 10-year fixed mortgages relatively expensive, as lenders’ costs of hedging at those maturities are much higher.”
For mortgage professionals, the result is a market where shorter-term fixed rates remain the most competitive, while longer-term fixes are priced at a premium.
“For borrowers, the choice comes down to priorities: if flexibility and lower rates now are key, shorter fixes look more attractive,” Mendes pointed out. “If long-term certainty is worth paying for, a 10-year deal can still make sense, but the gap in pricing explains why those products have not come down in the same way.
“It’s also worth noting that today’s mortgage market is very different from the 1980s, with far more competition and product choice. While higher long-term yields are keeping 10-year fixes elevated, borrowers still have access to shorter fixes and trackers at competitive levels.”
Looking ahead, Mendes stressed the key drivers to watch will be inflation data, the Bank of England’s signals on rate policy, and government debt issuance. “All of these directly influence gilt yields and swap pricing,” he said.
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