Short-term UK Government Debt Sell-off Affects Mortgage Lending

Summary

In late 2022 and into 2023, a sell-off in UK government bonds sent yields sharply higher, particularly at the shorter end of the curve most closely tied to mortgage pricing. The turmoil was initially ignited by then-Prime Minister Liz Truss's unfunded mini-budget of September 2022, which spooked bond markets and forced the Bank of England to intervene. Within days roughly 40 percent of mortgage products were pulled from the market and the average two-year fixed-rate mortgage surpassed six percent for the first time since 2008.

As yields stayed elevated into 2023, banks tightened lending criteria and raised rates further, contributing to a 23 percent decline in mortgage lending for house purchase that year. Mortgage arrears climbed roughly 30 percent year-on-year by end of 2023, reflecting the strain on borrowers rolling onto far more expensive terms.