If you are planning to apply for a mortgage or a remortgage, you may have heard the term ‘gilt yields’ mentioned in news reports or by financial experts.
Gilt yields play a crucial role in determining the cost of borrowing in the UK, especially for fixed-rate mortgages. But what exactly are they, and how do they impact your mortgage application?
What are gilt yields?
Gilts are essentially IOUs issued by the UK government. When the government needs to borrow money to fund public services or infrastructure, it sells these bonds (gilts) to investors like pension funds and banks.
The 'yield' is the annual return an investor gets for holding that gilt. Because the UK government is seen as a very safe borrower, gilt yields are used as a benchmark for almost all other types of lending in the country.
In simple terms:
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High gilt yields mean the government is paying more to borrow money.
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Low gilt yields mean it is cheaper for the government to borrow.
How do gilt yields affect mortgages?
What borrowers need to know is that gilt yields are the foundation upon which many mortgage rates are built. Lenders use gilt yields to price their products, particularly fixed-rate mortgages.
If gilt yields rise, it becomes more expensive for banks to source the money they lend to you. To maintain their profit margins, lenders will usually respond by increasing their mortgage interest rates. Conversely, when gilt yields fall, lenders often have more breathing room to introduce cheaper mortgage deals.
Gilt yields are also a reflection of market expectations. If investors believe inflation will stay high or that the Bank of England will raise the base rate, gilt yields typically climb. This "forward-looking" nature means mortgage rates can sometimes rise or fall based on gilt movement before the Bank of England even makes an official announcement.
Gilt yields vs. Swap rates
While gilt yields represent the government's borrowing costs, swap rates (which we have covered previously) represent the cost for banks to swap variable interest rates for fixed ones.
The two usually move in tandem. When gilt yields go up, swap rates generally follow, leading to the mortgage rate hikes we see on the high street.
What are gilt yields doing right now?
Gilt yields can be volatile and are sensitive to global economic events and government fiscal policy (such as the Budget). After a period of significant fluctuation over the last year, the market is keeping a close eye on inflation data to predict where yields will go next.
Currently, if yields show a downward trend, it provides a "green light" for lenders to start a price war, leading to more competitive rates for first-time buyers and those looking to remortgage.
How to navigate the market
Because gilt yields - and subsequently mortgage rates - can change daily, timing your application can be tricky. This is why many borrowers choose to secure a rate as early as possible.
If you are concerned about how shifting gilt yields might impact your ability to get an affordable mortgage, get in touch to book a free, no-obligation chat with one of our advisers.