Despite the Bank of England's potential rate cuts, Brits prepare for increased mortgage payments.

• The possibility of longer mortgage terms with higher interest rates for Britons is imminent, as the Bank of England prepares to lower interest rates on Thursday.
• Last week, Rachel Reeves' tax-and-spend budget caused markets to tremble, and now analysts predict an increase in near-term growth and inflation.
• Mortgage borrowers are facing confusing times as they expect a base rate cut but fixed rates are predicted to increase, according to David Hollingworth, associate director at L&C Mortgages.

The government's tax-and-spend budget has caused expectations for near-term interest rate cuts to be thrown off, resulting in Britons potentially facing higher mortgage rates for an extended period.

The Bank of England is predicted to reduce interest rates on Thursday, marking the second time this year. However, predictions for a more relaxed monetary policy in the future are uncertain after Finance Minister Rachel Reeves announced £40 billion ($51.41 billion) in tax increases and a change to the U.K.'s debt rule last week.

On Thursday, U.K. borrowing costs increased as investors considered the impact of Reeves' excessive borrowing and the potential consequences of tax increases on growth and inflation. Since then, gilt yields have remained elevated, with the 10-year yield, which moves inversely to prices, reaching 4.508% on Wednesday.

Despite a gradual decline in home borrowing costs after the BOE's initial rate cut in August, some smaller and mainstream lenders increased mortgage rates, anticipating that interest rates may remain high for an extended period.

Mortgage borrowers are facing confusing times as they expect a base rate cut but fixed rates are predicted to increase, according to David Hollingworth, associate director at broker L&C Mortgages, who made this statement on Friday.

After the budget, Virgin Money became the first major lender to increase mortgage rates by 0.15%. However, some banks, including Santander, reduced rates by 0.36%. Despite this, the average five-year fixed mortgage rate has decreased to 4.64% from 5.36% last year, while the average two-year fixed rate has decreased to 4.91% from 5.81% over the same period in 2023, according to data from Rightmove.

While the current rate increase is not as severe as the one that negatively impacted mortgage rates in the past few years, if funding costs do not decrease, the sub 4% 5-year fixed rates we have grown accustomed to in recent months could be at risk. Hollingworth pointed out that more lenders may reevaluate their rates in the future.

Later but further

The Bank of England's perceived inflection point is marked by Reeves' fiscal reset, which has been more hawkish than other major central banks' monetary easing approaches.

Despite a decrease in inflation to 1.7% and a slowdown in wage growth, economists predicted a quicker pace of rate cuts last month. However, post-budget forecasts from the Office for Budget Responsibility suggest that near-term economic growth and inflation may remain high.

Allan Monks, J.P. Morgan's U.K. economist, stated in a Monday note that BOE policymakers are likely to maintain their previously indicated "gradual approach" to rate cuts. He also mentioned that interest rates may remain 50-basis-points higher than anticipated at the end of the cutting cycle.

On Wednesday, markets are predicting a 97% probability of a 25 basis point reduction in interest rates on November 7th, resulting in a key rate of 4.75% for the bank.

Analysts agreed that a Thursday cut was possible, but they suggested that the bank would take a more cautious approach after that.

Goldman Sachs predicts that the prospects for stronger growth in 2025 will reduce the need for immediate rate cuts, and the BOE is expected to keep rates steady in December before making sequential cuts from February to reach a bank rate of 3% in November.

Citi on Tuesday predicted a December hold, citing "greater fiscal activism" from the government as a reason for caution. However, it also stated that a more "aggressive" approach could be expected once Reeves' plans are implemented, forecasting consecutive cuts from May without specifying a number of reductions.

"A guarded approach in the near-term implies a more aggressive cutting cycle later on, with the ultimate direction of travel being further away," analysts wrote in a note.