Important information 

As of 9th October, Waystone will be the fund ACD and any reference to Link or LF should be taken as WS or Waystone.

The price of mortgages

How are gilt prices affecting mortgage rates – and, in turn, discretionary spending?

If gilt yields remain at current levels – and with the normal 100-200 basis points (bps) spread above gilts for mortgages having recently reasserted itself – mortgage rates are likely to be three percent higher over the coming years.

The five-year gilt yield, which underpins the five-year mortgage rate, was up around two percent at the end of 2022.

Source: Trading Economics, 10/01/23


The three-year gilt yield was up by a half-percent more. The base rate was up by 3.25%. While UK borrowers do move between variable and fixed mortgages, and by terms of typically between two and five years, the fact is that the price of all the underlying rates has jumped by over two percent. Worse, the former cheapest offer – the variable rate mortgage – has jumped by the most, and so most borrowers will suffer an increase of three percent or so.

For example, a typical expiring mortgage of three times salary, priced at 1-2%, will refresh to a new price of 4-5%, an increase of around 3%. This is an extra 9% of gross salary and 13% of net salary.

Discretionary spending under pressure

A broad basket of US-listed consumer discretionary shares was down over 30% in 2022. UK homebuilders share prices are down between 20% and 50%. Home prices have already started weakening at the margin, as evidenced by e.g., the Nationwide House Price index. Investors are struggling though to determine the second order effects of a consumer under such pressure. Consumer discretionary names are clear losers, but there are plenty of less obvious impacts. Bad debts will affect banks. Higher claims in tough times affect insurers. Head-count reduction in the leisure sectors will raise unemployment. The list goes on.

US mortgages overall are less volatile due to the 30-year US mortgage market structure; an existing US borrower is broadly unaffected. However, new US borrowers have also seen a 300bps increase in the cost of a 30-year mortgage and this is starting to have a meaningful impact on US house prices.

The good news

We believe inflation has peaked, and the latest readings are starting to undershoot expectations. Base rates may well therefore peak in mid-2023, and from then on borrowing pressure could start to ease. Salary inflation in the new year will also help. And, of course, markets have already priced in much of the bad news.


Important Information

The value of investments may fall as well as rise and investors may not get back the amount invested.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.

No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.

The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

This page is for information only. It does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the Literature section.