Mortgage rates in the United Kingdom are expected to rise further as the cost of funding for lenders reaches a three-year high, driven by fluctuations in global financial markets and geopolitical tensions. On Wednesday, Britain’s five-year swap rates—the benchmark interest rates that banks charge each other for borrowing—climbed to 4.57%, the highest level since October 2023. Meanwhile, two-year swap rates increased to 4.47%, marking their highest point since March.

The recent surge in swap rates follows escalating conflict involving the United States, Israel, and Iran, raising concerns about instability that has contributed to volatility in financial markets. Swap rates are a key factor used by mortgage lenders to set fixed mortgage rates, meaning the increases are likely to translate into higher borrowing costs for homeowners and prospective buyers.

Currently, the average two-year fixed mortgage deal stands at around 5.59%, with five-year fixed deals at approximately 5.63%. Industry experts indicate further rises are probable. Lucian Cook of Savills anticipates lenders will continue to raise fixed-rate mortgage costs in the near term. Karen Noye from Quilter noted that if swap rates remain elevated, fixed mortgage rates are expected to face upward pressure in the coming weeks, posing challenges for homebuyers and those nearing the end of fixed-rate agreements.

The developments come as the new Prime Minister, Andy Burnham, faces significant pressure to address the rising cost of living. Despite pledges to ease financial burdens on households, Burnham declined to rule out potential tax increases or further government borrowing during his first Prime Minister’s Questions session. Tory leader Kemi Badenoch questioned whether the government would commit to avoiding additional borrowing that could exacerbate family financial pressures. Burnham responded by placing responsibility for current borrowing costs on previous Conservative governments, emphasizing his administration’s commitment to fiscal responsibility while seeking measures to alleviate inflationary pressures on households.

Meanwhile, government borrowing costs have been rising sharply, with the yield on the 10-year UK government bond reaching its highest point since 2008 amid ongoing bond market sell-offs. Mortgage broker SPF Private Clients CEO Mark Harris highlighted concerns that rising mortgage costs coinciding with increased energy bills this winter could place significant strain on consumers.

Further compounding the issue are rising oil prices tied to threats against supply routes in the Strait of Hormuz, which may rekindle inflationary pressures and delay potential interest rate reductions. Rachel Springall of Moneyfacts urged borrowers to seek mortgage advice promptly and consider locking in new deals as lenders begin to raise rates. Zoopla’s Richard Donnell observed that inflation fears are pushing finance costs higher, potentially keeping mortgage rates near 5%, well above levels seen earlier this year. He added that homebuyers, particularly in southern England, have already seen a substantial reduction in their buying power, with an estimated 9% decline since January.

Efforts by the government to curb cost-of-living increases and stabilize the housing market are likely to face ongoing challenges amid these financial and geopolitical uncertainties. Officials were contacted for comment but declined to provide an immediate response.