The political turmoil surrounding Prime Minister Keir Starmer's future is driving up borrowing costs and risks pushing mortgage rates higher for millions of households, experts have warned.
Market Reaction to Leadership Uncertainty
The drama, with Sir Keir vowing to fight on despite mounting calls for him to resign, has spooked financial markets. One significant impact has been on the bond market, which the government relies on for borrowing.
The yield on benchmark 10-year gilts surged 0.10% to 5.10%, just below the highest levels since 2008 reached in March on concerns about the inflationary impact of the Iran war. The longer-term 30-year yield rose to 5.81% at one stage, the highest since 1998, before easing slightly.
Impact on Mortgages and Household Finances
The big question is what happens next, with consequences not only for public finances but also for ordinary borrowers and savers. Neil Wilson, investor strategist at Saxo UK, warned: "We could see a blowout in longer-dated gilts if this turns into a dogfight. Markets tend to dislike a lack of certainty over who runs a government. It is not good for the government and it is not good for mortgages as well."
Economist Mohit Kumar from Jefferies said: "A managed exit would be our base case scenario. Any replacement would likely be left leaning." The jump in gilt yields is not as severe as the 0.30% spike after Liz Truss's mini-budget in 2022, which sent mortgage costs soaring, but it comes from a lower starting point.
UK borrowing costs remain the highest among the G7 advanced economies and have risen the most since the Iran war. Kathleen Brooks, research director at XTB, noted: "The bond market is reacting not only to Starmer's potential departure but also to who his successor could be, and to the prospect of a drawn-out leadership battle leading to more fiscal promises that the UK cannot afford."
Fixed-Rate Mortgages Under Pressure
Fixed-rate mortgages, which had just begun to ease after a spike caused by US President Donald Trump and Israel's war with Iran, are now at risk again. These loans are based on swap rates, which are influenced by gilt yields and expectations for the Bank of England's base rate. Political upheaval makes it more likely that rates will stay higher for longer.
Maike Currie, vice president of personal finance at PensionBee, explained: "Political instability matters because uncertainty can quickly filter through to pensions, mortgages and household finances. The 2022 mini-budget demonstrated how fast turmoil in gilt markets can spill into retirement savings and pension stability."
Higher gilt yields feed directly into mortgage pricing and borrowing costs. For the estimated 1.8 million households due to remortgage this year, renewed volatility risks keeping mortgage rates higher for longer. However, higher gilt yields also improve annuity rates, allowing those converting pension savings into guaranteed income to secure stronger retirement incomes.
Broader Market Effects
Shares in banks took a hit amid speculation that a surcharge will rise to 5% from 3% as a leftward shift in policy becomes more likely. Bond markets across Europe also came under pressure as hopes for a peace deal on Iran faded. Chris Beauchamp, chief market analyst at IG, said: "The turmoil pushes yields higher and raises the risk of weaker economic growth, hurting earnings and savings. Higher borrowing costs and a weaker pound is a deadly combination."
International investors could stay away, hitting vital flows needed to help stock markets move higher. This partly explains why the FTSE 350 performed poorly after 2016, and there is a risk of another few years of lost returns if political instability makes a real comeback.
