Bond market turmoil has lead to mortgage holders, people with pension pots and those with savings to be issued an urgent warning. The pound briefly fell to a 14-month low against the US dollar on Thursday morning after the sell-off in the bond market.
The sell-off in Labour Party government bonds – known as gilts – drove up the yield, or interest rate, paid to those holding them and therefore UK borrowing costs. Rates on new fixed-rate mortgages could start to creep up as a result of the bond market turbulence as lenders get funding for loans from the money markets, it has been warned.
Simon Gammon, the managing partner at Knight Frank Finance, said: “They tend to be funded in a way that means they are more exposed to bond market volatility. The larger lenders can absorb more of that volatility, and indeed they are incentivised to hold rates as low as they can.
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“The new year brings fresh lending targets, and they’ve had a difficult few years in the mortgage market.” Sarah Coles, a personal finance expert at Hargreaves Lansdown, told the Guardian there is no need for prospective borrowers to panic.
The current prices will affect lenders who are securing finance now, but if the markets calm down, mortgage rates will fall back again. It is also unlikely you’ll be affected if you are aged under 50 and saving into a pension pot.
Hal Cook, a senior investment analyst at Hargreaves Lansdown, said “for those members in the middle who are approaching retirement, it’s potentially a bigger issue”. “This could cause concern for those approaching retirement who have plans for their pension pot at the point of their retirement, or are worried about the value of their tax-free cash [which depends on the value of their pot on a specific date],” says Cook.
“For people in retirement who are currently accessing their pension via drawdown, this spike in gilt yields could be a good thing,” he says. “They might now consider using some of their remaining pension pot to purchase an annuity, given prices will reduce. This could allow them to lock in an income for life at lower prices.”