UK homeowners prepare for increased mortgage payments as interest rates rise.

• The increase in U.K. borrowing costs is predicted to impact the British housing market.
• On Monday, Virgin Money raised its two- and five-year fixed-rate mortgages by 0.2%, and also made similar increases to some of its remortgage deals.
• The Bank of England is expected to reduce interest rates by 25 basis points in February, but the future outlook is uncertain.

Thousands of U.K. homeowners may face higher mortgage rates due to an increase in U.K. borrowing costs.

On Monday, Virgin Money raised its two- and five-year fixed-rate mortgages by 0.2%, and made similar increases to some of its remortgage deals.

According to David Hollingworth, associate director at L&C Mortgages, markets were becoming less optimistic about the speed and extent of the base rate fall this year, as he shared via email with CNBC.

Despite the possibility of interest rate cuts, the likelihood of improvements in fixed mortgage rates has decreased, causing them to rise.

Borrowing costs for mortgage lenders were predicted to decrease this year along with a reduction in interest rates. However, economic concerns have caused a decline in the demand for U.K. government bonds, or gilts, which has delayed the anticipated decrease in borrowing costs, indicating that they may remain high for an extended period.

The 10-year gilt yield in the U.K. was around 4.88% on Tuesday, increasing after reaching its highest level since 2008 last week.

The Bank of England is expected to cut interest rates by 25 basis points at its next meeting in March, with a 62% chance of doing so, according to an LSEG poll. Beyond that, the outlook is uncertain.

According to Matt Smith, a mortgage expert at Rightmove, the short-term effect of the increase in borrowing costs is that mortgage rates are likely to rise.

To avoid being hit by rising interest rates, borrowers should secure new rates now, before their current deals expire, with the option to revisit them later if conditions improve, as advised by Hollingworth.

Smith from Rightmove predicts that an increase in property transactions due to buyers wanting to beat the upcoming rise in Stamp Duty Land Tax may result in lenders maintaining lower borrowing costs in the short term.

Although expenses have risen, the beginning of the typically busy season for the housing market is approaching, so lenders are likely to offer competitive rates to capitalize on the demand, according to Smith.

Risks for property prices

If mortgage rates rise, it could affect home prices, according to Zoopla, which predicts that prolonged high rates may change its 2025 price growth projections.

Donnell stated in an email that our forecast for 2.5% house price growth over 2025 is based on the assumption of average mortgage rates of 4.5%. If mortgage rates are below 5%, it is consistent with low single-digit house price inflation.

According to Zoopla, the average rate for a five-year fixed mortgage at 75% loan-to-value (LTV) increased from 4.1% in October 2024 to 4.4% at the end of the same year.

According to Rightmove data, the average five-year fixed rate was around 4.82% as of Jan. 14.

If mortgage rates rise, it will lead to a return of flat prices and a moderate, single-digit price decline, according to Donnell.

Last year, home sellers in England and Wales experienced their lowest returns in over a decade, marking the second consecutive year of declines in cash profits following the market peak in 2022.

In 2024, the average seller made 42% in gross profit, down from 55% in 2022 and 60% in 2016, as the market cooled, according to national estate agents Hamptons.