As all long-term lenders price their mortgages with reference to the price of gilts – or units of government debt – mortgage rates are now rising as the cost of gilts rise. Since October, as the Conservative lead over Labour has diminished, gilt yields have increased by over half a percent.
Research suggests that gilt yields will have to rise by a further 0.75% to about 4.75% in the event of a hung parliament – higher if inflation returns as a serious threat. This will mean lenders could raise mortgage rates by 0.75%.
Jonathan Moore, director of the flatshare website, said: “Mortgages rates are linked to the wider financial market. If the wholesale financial market is concerned that a hung parliament cannot cut the deficit, and that inflation will rise, yields on gilts will rise – pushing up the cost of mortgages. A rise of 0.75% in gilt yields is a conservative estimate of the impact of a weak or hung parliament.”
If gilt rates went up by just 0.75%, and mortgage rates rose accordingly, higher mortgage rates would cost families an extra £624 next year on a new £118,000 mortgage – the average according to the latest figures from the Council of Mortgage Lenders – or £52-a-month on a repayment mortgage. This is the equivalent of raising Income Tax by three points to 23% for someone earning the UK average wage of £25,800.
Moore added: “Not cutting the deficit might defer painful tax and spend decisions but voters will end up paying for it on their mortgage. If we don’t deal with the debt crisis we’ll have bigger mortgage bills for families.
“First-time buyers were given a small boost by doubling the Stamp Duty tax-threshold. But the benefit of this would be wiped out by the jump in mortgage rates a hung parliament would bring about, continuing the freeze in the mortgage market. Mortgages are already too expensive and restrictive, and thousands more first-timers will be kept out of the market. To combat this, we need to see state-backed lenders considering the income that can be generated from a lodger when they decide how much to lend to a borrower.”
