Households across Britain are facing financial strain as mortgage borrowers face extra costs of up to £8,000 per year or more. Five years ago, mortgage rates could be fixed at 1.3%, but now, as fixed-rate loans end their terms, average five-year deals are around 6%, with many mortgages already above that level.
Families will be forced to make significant savings, with options including cancelling holidays, cutting family meals, and making Christmas leaner for their children. For people living alone, the situation could be worse, with some having to find an extra £500 or £600 every month while already struggling.
Why mortgage rates are rising
Mortgage rates and government borrowing costs are connected. When the government's cost of borrowing rises, it filters into mortgage costs, hurting families and other adults who have borrowed to buy homes. Because the government overspends, it has to keep returning to the bond market to borrow more.
In August alone, the government borrowed another £18.3 billion. In the first five months of this financial year, borrowing reached £77.3 billion, already £8.1 billion above forecast. The bond market is happy to keep lending for now, but it is worried about inflation, enormous borrowing levels, and whether Andy Burnham has finances under control.
Borrowing costs at record highs
Investors demand a higher rate of interest, and the UK now has the highest 10-year borrowing cost of any of the richest Western nations, around 5.5%, higher even than Italy's. The 30-year rate has just smashed through 6%, its highest since 1998.
Andy Burnham can address this, but it is politically painful. The Prime Minister has to learn to say no to more welfare spending, an ever-growing state, and spending money the country does not have. The situation is partly because borrowing another £10 billion is easier than saying no, with voters not noticing until borrowing costs go up and mortgage bills arrive.
Budget opportunity and long-term outlook
Burnham's complaint that Britain is "in hock to the bond markets" is worrying. The UK owes around £3 trillion and adds to it every month, with around £130 billion spent on debt interest last year. The turnaround has to start on October 28 when Chancellor John Healey delivers the Budget.
This gives Burnham a huge opportunity to reset and show the country and lenders that finances are under control. If the bond market believes him, confidence could improve and government borrowing costs could start falling, helping lower mortgage rates. That would bring cheaper mortgages, more business investment, and lower government interest payments, freeing real money for hospitals, schools, police, and defence.
There will be short-term pain, but if Burnham does not act, the long-term outlook is grim. More taxes will disappear on interest payments, interest rates will stay painfully high, economic growth will suffer, and debt will pile on debt. Eventually, children will inherit a country paying yesterday's bills instead of investing in tomorrow.
Andy Preston is a former fund manager and was the elected mayor of Middlesbrough from 2019 to 2023.
