Is it time to lock in U.K. mortgage rates?

Rates in the U.K. have been on the rise of late, despite the U.S. government shutdown and investor anxiety that has spread throughout the capital markets. Economic data in the U.K. has been stronger than expected over the past quarter, leading the Bank of England to focus on increasing growth without additional stimulus. Unfortunately, inflation in the U.K. has been stickier than other major developed countries, which could generate even higher yields pushing up the rates used for mortgages.

Most major developed countries have an active mortgage market that is tied to the performance of government long-term bonds. The U.K. is no different as mortgage rates are generally tied to the returns of 10-year gilts. The change in rates is a function of economic performance especially the changes in inflation. Inflation is considered the change in prices of a basket of goods and services, and upward movements in inflation could erode the value of fixed income products such as bonds and mortgages. Higher rates of inflation make fixed income products less valuable in the future as the fixed rate of return cannot compensate for an upward bias to higher prices for goods and services.

Changes to Inflation

On Tuesday, Oct. 15, 2013, the Office for National Statistics reported that annual consumer price inflation was unchanged from August at 2.7%, as opposed to the consensus estimate of economists’ for a drop to 2.6%. The increase in the CPI is still below the 3% guideline set by the Bank of England, but it is coming very close to an uncomfortable level that could push central bankers into the uncomfortable position of having to upwardly adjust interest rates prior to seeing increases in growth.

The surprise upward bias to inflation has pushed the 10-year gilt yields to 2.805%, their highest since Sept. 25, 2013, while gilt futures extended losses hitting a three-week low. Bond prices and yields move in opposite direction so while yields increase the corresponding price of the bond declines.

Other Economic Data

Later in the week investors will need to absorb other economic data points that could alter the direction of mortgage rates. The U.K. labor markets have also been a driving force behind the recent rise in Gilt yields. The U.K. labor market has fared better than the euro area and the U.S. and this is likely to be evident by another decline in the claimant count. A stronger labor market will potentially increase yields as traders perceive that the Bank of England will need to increase interest rates in an effort to fend of labor market inflation.

Yields over the past month have decline in sympathy with the government shutdown in the United States, but the downward trajectory will likely be curtailed by stronger than expected economic data. Since May of 2013, 10-year yields have climbed nearly 75 basis points (100 to the highs made in September), increasing the mortgage rates used at banks like Yorkshire Building Society. Those who are considering locking in rates, should consider the current levels relative to the long term historical average as attractive, and lock in rates if they are poised to purchase a property.

About the Author

Marcus Holland is an editor at, a guide to online trading that offers news, education and analysis of different financial instruments.

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