The Intermediary – October 2025 - Flipbook - Page 64
L AT E R L I F E L E N D I N G
Opinion
Budget 2025: Lifeti
hen clients
think about
mortgage
product rates,
they usually
picture the
Bank of England nudging the Bank
Base Rate (BBR) up or down, and
lenders reacting accordingly.
Of course, this is far too simplistic,
and within the later life product space
in particular, we know the situation is
very different. Lifetime mortgages, for
example, are fixed for life, and the real
driver of pricing is the cost of longterm borrowing in the markets. That
means gilt yields, and the swap rates
built on top of them.
When those move, lenders’
funding costs move with them, and
the products advisers can offer their
clients reprice quickly. With the
Chancellor’s Budget due on the 26th
November, understanding the link
between fiscal policy and the cost of
later life lending has never been more
important.
W
An important moment
We are already in a period of elevated
long-term yields. Gilt rates are at
levels we haven’t seen for almost 30
years, reflecting both global pressures
and the way investors are judging the
UK’s fiscal outlook.
Markets don’t just look at the year
ahead. They care about the path
of borrowing and debt over many
years, and they adjust the return they
demand accordingly.
With the [Budget
due] understanding the
link between fiscal policy
and the cost of later life
lending has never been
more important”
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The Intermediary | October 2025
That is why a Budget that signals
higher deficits for longer can push
up yields and increase the term
premium, even if the Bank of England
leaves BBR unchanged. The IMF
recently published work showing that
every one-percentage-point rise in
the projected deficit-to-GDP ratio has
historically added 20 to 30 basis points
to long-term interest rates. That might
not sound much, but when it feeds
directly into lenders’ funding costs,
the impact on mortgage pricing is
significant.
Another factor is the supply and
demand dynamic in the gilt market
itself. If the Debt Management Office
has to sell more gilts to cover higher
borrowing, investors need to absorb
that extra issuance.
But with the Bank of England
shrinking its balance sheet through
quantitative tightening, one major
buyer has stepped back. That leaves
a larger burden on private investors,
who are naturally more pricesensitive. When supply goes up and
demand is choosier, the clearing yield
dris higher, and the long end of
the curve – which maers most for
lifetime mortgages – tends to bear
the brunt.
The Office for Budget Responsibility
(OBR) has also underlined how
sensitive the public finances are to
yield moves. With debt at around
100% of GDP, a one-percentage-point
rise in gilt yields adds roughly 1% of
GDP to annual debt interest costs.
Markets know that, and if they sense
policymakers are ‘kicking the can
down the road’ rather than rebuilding
buffers, they will demand a higher
premium today to insure against
tomorrow’s risks.
Credible change
Credibility is perhaps the most
important piece of the puzzle.
Budgets are about signals as much
as spreadsheets, and if investors feel
rules are being bent too far or costings
don’t stack up, they will adjust prices
immediately.
ROLAND STEERE
is director of funding
at more2life
We don’t have to look far for an
example. In September 2022, the
mini-Budget triggered an abrupt surge
in gilt yields and swap rates. Within
hours, lenders were pulling products
and advisers were le trying to shield
clients from sudden, painful changes.
Post-mortems from central banks
and academics alike put the blame
squarely on a loss of fiscal credibility.
That lesson remains fresh: when
credibility disappears, mortgage
pricing can move almost overnight.
Another area to watch is growth
and productivity assumptions. A
Chancellor can make the numbers
look beer on the day by leaning
heavily on optimistic forecasts, but
if those assumptions unravel later,
the market reaction can be sharp and
poorly timed for borrowers.
The OBR’s assessments are central
to this process, and if its outlook is
downgraded aer the Budget, it can
have a direct impact on gilt yields, and
therefore on the swap rates used in
mortgage pricing. Optimism without
credible delivery mechanisms tends
to push term premia higher, and that
ultimately feeds through to the cost of
borrowing for clients.
Inflation is another way fiscal
choices and monetary policy collide.
If the Budget is judged inflationary
– whether through net demand
stimulus, energy measures, or tax
changes that boost consumption –
markets may conclude that the bank
will need to keep rates tighter for
