Homeowners in UK and beyond hit as global bond selloff drives up mortgage costs

By Suban Abdulla and Lawrence White

LONDON, Oct 1 (Reuters) - For five years, the interest rate on Richard Merrett's mortgage was locked at 1.14%, but with that ultra-cheap deal due to expire in early 2027 he faces a sudden trebling of his monthly housing costs from £550 ($728) a month to £1,650.

Merrett is no stranger to the risks in the lending market — he is managing director at mortgage firm Alexander Hall. But even he has been shocked by the scale of the increase, which has been stoked by a surge in energy prices caused by the Iran war.

"It's a big jump up and it means that the monthly payments are trebling. So there'll be some sharp intakes of breath and some belt-tightening," Merrett told Reuters.

A global bond market selloff has propelled borrowing costs from the US to Japan to decade highs and is impacting Britain's mortgage market, which could feed through to the wider economy.

It is also a harbinger of what could happen in the euro zone, the US and beyond if rates remain stubbornly high.

BORROWERS FACE MOUNTING PRESSURES

The rise in Britain's 30-year government bond yield, which topped 6% on Thursday for the first time since 1998, will further increase mortgage rates as banks pass on the increased cost of funding to homebuyers, said Nicholas Mendes, mortgage manager at broker John Charcol.

"For borrowers, today's moves add to pressure that has been building for weeks," he said.

The 30-year yield stood just below 6% on Friday.

Unlike in much of Europe and the US, where fixed-rate mortgages are typically funded via multi-decade loans, in Britain they are usually priced from two- and five-year swap rates. 

The Bank of England in July estimated that over 5 million households were projected to see their mortgage repayments increase by end-2028, more than 1 million more than it expected before the start of the conflict in the Gulf.

For a typical homeowner, monthly mortgage repayments were projected to increase by a relatively manageable £45. 

But for almost 750,000 people such as Merrett, who took out fixed-rate mortgages before rates began rising in 2022 from their COVID-era lows and which are due to expire this year, the average increase is £170 per month, the BoE estimated.

Mendes at John Charcol said Britain's 2-year Sonia swap rate has risen 27 basis points in the last month to 4.68%.

"That adds around a third of a percentage point to the cost of funding a fixed rate, and lenders cannot absorb that for long," he said.

Shortly after the start of the Iran war British banks withdrew more home loan products than on any day since the 2022 mini-budget crisis under then-Prime Minister Liz Truss. Lenders have been pulling sub-5% deals in recent days.

GLOBAL PHENOMENON

Mortgage rates around the world are rising.

The US rate on a 30-year fixed-rate mortgage has soared more than 100 basis points since the war started and this week hit 7.28%, its highest in almost three years, dealing another blow to first-time buyers. The week-on-week increase — the 30-year rate was 7.03% last week — was the biggest in about four years.

In the euro area, loans with an initial fixed-rate period of 10 years-plus rose by 8 basis points to 3.43% in August. The surge in euro zone government yields in recent weeks will push rates even higher. 

In Australia, home prices fell for a sixth straight month in September, on track for the worst downturn in three decades.

In Britain, house prices last month rose at their weakest pace since December 2025, Nationwide Building Society said on Thursday, reflecting worries about possible Bank of England rate hikes.

MORTGAGE APPROVALS FALL

Data published this week showed the lowest number of UK mortgage approvals since the end of 2023, another sign of how rising borrowing costs are hitting demand.

Ashley Webb, senior UK economist at consultancy Capital Economics, said he still expected UK house prices to rise by 2.5% in 2027, amid a lack of homes being put up for sale.

But the possibility of another jump in government borrowing in finance minister John Healey's first budget on October 28 could put more pressure on borrowing costs and "limit the housing recovery", Webb said.

For Merrett, the UK mortgage broker, the feeling is one of helplessness without the prospect of an end to the Iran war and no let-up in inflation pressures.    

"I am worried. Why wouldn't you be when mortgage costs are trebling?" Merrett said. "But I remain quietly optimistic that we'll see some correction and things come down."

($1 = 0.7559 pounds)

(Additional reporting by Tommy Reggiori Wilkes, Marissa Davison and William SchombergEditing by Gareth Jones )