UK Bond Market Turmoil Sparks Higher Borrowing Costs and Reduced Pension Returns

The bond market sell-off has caused borrowing costs for UK households to spike, affecting mortgages, pensions, and savings. The current turmoil is making it more expensive for people to borrow money due to higher gilt yields.

Lenders get funding for home loans from the money markets, with fixed mortgage rates influenced by 'swap rates' rather than the Bank of England base rate. The spike in UK government borrowing costs has caused swap rates to jump sharply over the past week, prompting Coventry Building Society to warn brokers that it will hike fixed-rate deals for new and existing borrowers.

This means that people who need to remortgage or buy their first home may face higher interest rates. The average rate on a new two-year fixed-rate mortgage stood at 5.59%, while the typical rate on a five-year deal was 5.63%. David Stirling, an independent financial adviser, advises borrowers to lock in their offer of a rate now.

Pension holders who are approaching retirement may also be affected by the bond market turmoil. If they have investments in government bonds (gilts), the current prices and yields could mean less money for them when they need it. However, younger workers with several decades to go until retirement should not take knee-jerk actions, as their pension will experience several periods of market turbulence.

The bond market turmoil is also affecting savings rates. The top-paying easy-access savings accounts currently pay about 4.5% interest. Sarah Coles, head of personal finance at AJ Bell, notes that the current market gyrations tend to be good news for savings deals as banks usually react by increasing their interest rates.