Downing Street has ordered banks to protect struggling homeowners from soaring mortgage costs, given the volatile mortgage and interest rate environment in Britain.

Higher government borrowing costs and expected further rises in interest rates mean mortgage costs are forecast to continue climbing in the months ahead. Mortgage rates have soared since late May with a typical loan from Halifax rising from 4.59 per cent to 5.41 per cent, adding almost £100 to the monthly repayments of a homeowner with a £200,000 debt, according to L&C Mortgages.

Official data yesterday showed average earnings jumped at the fastest rate on record last month and unemployment registered a shock fall. The buoyant jobs market raises pressure on the Bank of England to go further to tackle inflation, which remains more than four times higher than its target.

Further rate rise expected

Expectations of further rate rises sent the yield on two-year gilts as high as 4.9 per cent surpassing the peak of 4.6 per cent reached after former prime minister Liz Truss’s mini-budget last September. Separate Bank of England data showed the property market is already feeling the strain of higher rates.

Mortgage lending fell sharply in the first three months of the year as buyers pulled back in the face of rising costs. Unexpectedly strong wage growth data prompted traders to once again revise up forecasts for the peak of interest rates yesterday, which sent Government borrowing costs to their highest since 2008.

This comes as Governor of the Bank of England, Andrew Bailey, said he is poised to launch a review into why the central bank has been so wrong-footed by inflation. Bailey admitted that price rises were “taking a lot longer than we expected” to return to the Bank’s 2 per cent target.

A spokesman for Prime Minister Rishi Sunak told banks to look after customers, who are struggling with the jump in costs. 

According to the spokesman “The Chancellor has made clear his expectation that lenders should live up to their responsibilities and support any mortgage borrowers who are finding it tough right now. There do remain a large range of mortgage deals available to the public, but we know this current situation may be concerning for some homeowners and mortgage holders.”

A total of £58.8 billion was loaned out to homebuyers, down almost one-quarter compared with the same period of 2022 and the lowest level since the depths of the pandemic lockdown of spring 2020. Landlords are also taking punishment from the higher rates.

Buy-to-let profits have plunged to their lowest level since 2007 as interest rates and a government crackdown on the sector pile pressure on landlords’ finances. Profit margins for landlords with mortgages fell below 4 per cent in the first three months of 2023, according to new analysis from Savills estate agents. 

This was a significant drop compared with an average profit margin of 23pc between 2014 and 2021.