Will the bank surcharge push up mortgage rates? Brokers on who pays first

A higher bank surcharge would reach borrowers through squeezed margins, tighter lending criteria and fewer incentives, brokers told Newspage, although competition between lenders would limit how much they could pass on.

The Chancellor is delivering his first Autumn Budget on October 28, although no changes to banking taxes have yet been confirmed.

Newspage calculates that an additional £2 billion annual tax bill would equate to roughly £114 a year for every £100,000 borrowed if lenders recovered the entire amount from mortgage borrowers alone, spread proportionately across the £1.76 trillion of residential mortgages outstanding at the end of June, according to the FCA.

The potential impact would extend beyond monthly repayments. Brokers warn that lenders could withdraw cashback, reduce fee-free offers or become more selective about applicants, leaving some borrowers with fewer options even if headline rates barely change.

What is the bank surcharge and what is the Chancellor planning?

The bank surcharge is an additional tax on banking profits, and reports suggest the Chancellor could restore it to 8%, raising upwards of £2 billion annually. 

HMRC said it fell from 8% to 3% in April 2023, while corporation tax rose from 19% to 25%, taking the combined headline rate from 27% to 28%.

Mike Staton, Director at Mansfield-based Staton Mortgages, questions whether households would ultimately bear the cost of reversing that cut.

He said: "The Chancellor might be planning to tax the banks, but hardworking homeowners could end up footing the bill. Banks aren’t charities. If their costs rise, they could increase mortgage rates, tighten lending rules or reduce savings rates.

"The Government might call it a bank tax, but borrowers could end up paying the interest. The suggested £114 extra per £100,000 borrowed is only a theoretical estimate, not a guaranteed increase.

“My biggest concern is first-time buyers and families already struggling with mortgage costs. With the Budget approaching, I’d rather see policies encouraging lending, investment and growth, not potentially making borrowing more expensive. 

"You can’t promise to help people onto the property ladder while potentially making the first rung more expensive. If the Chancellor increases this tax, borrowers deserve to know whether they’ll be protected from the cost."

Would banks pass a higher tax on to mortgage borrowers?

Most experts expect some bank surcharge costs to reach customers, although they disagree over how lenders would recover them.

Stephen Perkins, Mortgage Broker and Managing Director at Norwich-based Yellow Brick Mortgages, says the consequences could extend beyond the advertised mortgage rate.

He said: "The £114 per £100,000 figure is a useful illustration of what full pass-through might look like, but I would not treat it as a forecast. Banks are unlikely to divide the tax bill evenly across mortgage customers and simply add a set amount to every rate.

“If margins are squeezed, the effect could appear in several places: slightly higher mortgage pricing, fewer cashback or fee-free deals, tighter criteria, lower savings rates or less appetite for some types of lending. Borrowers with small deposits or more complex circumstances could feel that first because they already have fewer lenders competing for their business. Trying to stop banks passing the cost on directly may sound simple, but in practice lenders have many ways to adjust pricing and appetite elsewhere."

Harry Goodliffe, Director at Winchester-based HTG Mortgages, believes visible competition on mortgage rates would push lenders towards other adjustments.

He said: "Savers will pay for this bank tax before borrowers do. Mortgage pricing is the one place lenders can’t hide a cost, because every rate sits on a comparison table and a rise of £114 a year per £100,000 would be noticed within the hour. 

"Savings rates, fees and tighter criteria for anyone with a small deposit are where it lands. Copying Spain’s ban wouldn’t work either; you can’t legislate for what a bank chooses not to offer. The Chancellor is asking lenders to back first-time buyers and growth with one hand and taking £2 billion a year out of them with the other. I expect fewer good deals."

How much could it add to a mortgage?

There is no agreed estimate: Newspage’s £114 per £100,000 illustration assumes the entire additional tax bill falls proportionately on mortgage borrowers.

Matt Coulson, Founder at Rickmansworth-based Heron Financial, says that overlooks how lenders distribute costs across their businesses.

He commented: "A cost like this gets recovered, but rarely as a clean jump in mortgage rates. A tax on profits is spread across the whole book and smoothed over time, so the £114 per £100,000 assumes full pass-through, which a competitive market won’t deliver.

"In reality it’s shared between borrowers, savers and shareholders, and the least visible levers move first. Expect slightly tighter criteria and meaner savings rates before any headline rate change. Who feels it first?

“The marginal borrower a lender was already unsure about, so higher-LTV first-time buyers and less-standard cases feel it before anyone spots a rate move. I’d also be wary of copying Spain’s pass-through ban.

"Money is fungible, lenders recover costs somewhere, and heavy caps usually just shrink lending. The real issue is coherence. You can’t lean on banks to lend more to first-time buyers through Your First Home and tax the capital behind that lending in the same Budget. Those are two policies pulling against each other."

The calculation does not account for costs absorbed through profits, efficiencies or other banking products.

Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, cautions against presenting it as an expected increase.

She commented: "Here's the uncomfortable question: if the Chancellor raises £2 billion from banks, how much of that bill will eventually land on ordinary households? Banks don't price mortgages based on political promises. They price risk, funding costs and profitability. 

"Higher taxes could mean less competitive mortgages, tighter lending or weaker savings rates. But let's not pretend the suggested £114 per £100,000 is a guaranteed increase. That's theoretical arithmetic, not how mortgage pricing actually works. First-time buyers with smaller deposits and borrowers refinancing would be particularly vulnerable if lenders tightened their margins or criteria.

“Spain's approach sounds attractive, but banning direct pass-through doesn't prevent banks adjusting prices elsewhere. My concern isn't whether banks can afford another tax. It's whether the government has properly considered who could end up paying it."

Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said: “It's inevitable that if the government increases taxation on banks and building societies, rates will become less attractive to both borrowers and savers, but assuming this affects every financial institution, there is very little anyone can do about this”.

Who would be hit first?

Borrowers with small deposits, stretched affordability or complex circumstances could be more exposed if a bank surcharge means lenders tighten their criteria, according to brokers.

Tracey Dixon, Buy-to-Let Mortgage Specialist & Owner at Cardiff-based Pure Mortgage and Protection, says access to a deal could matter as much as its price.

She commented: "A tax on banks should not become a backdoor tax on getting a home. Higher taxes could feed through to mortgage rates, fees or lenders’ willingness to lend, although competition means passing on the full cost is far from inevitable.

"My concern is the borrower with little room to manoeuvre: the first-time buyer stretching a deposit, the homeowner facing a payment increase, or the landlord whose rent only just supports the mortgage. 

“The impact could be fewer borrowing options as well as higher payments. A competitive rate means little if you no longer qualify for it. I wouldn’t endorse the £114 estimate without seeing the assumptions. Banks could absorb or distribute the cost in different ways; it cannot be assumed to land equally on every mortgage.

"The Chancellor should judge this policy on access to finance alongside tax receipts. A measure aimed at bank profits needs careful scrutiny if aspiring homeowners could end up paying the price.”

Should the Chancellor stop banks passing it on, as Spain did?

Experts are divided over whether a ban would protect customers. Spain’s legislation introducing its temporary banking levy for 2023 prohibited direct or indirect pass-through, although that levy differed from the UK surcharge on profits.

Craig Fish, Director at London-based Lodestone Mortgages, wants the UK to adopt the same principle.

He commented: "If the surcharge goes back to 8%, customers will pay for it one way or another. Savers will feel it first, because the easiest thing for a lender to do is hold back on savings rates. Then it filters into mortgage pricing for every borrower, and if the full cost comes through, around £114 a year per £100,000 borrowed sounds about right.

"Less capital also means less lending, which is the last thing first-time buyers need. Spain banned its banks from passing the cost on, and if the Chancellor goes ahead with this, the UK should do exactly the same, otherwise it’s borrowers and savers picking up the bill.

“I understand why the government is hunting for money, with a huge national debt to service. But why are successive governments so fixated on taxation? Where is the promotion and incentivising of growth?

"Grow the economy and the tax income will follow. You can’t tax your way to prosperity, and every time the banks get squeezed, it’s ordinary households who end up feeling the pinch."

Is a bank tax rise good or bad policy right now?

The disagreement centres on whether banks could absorb the increase or whether it would undermine lending and homeownership.

Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners, believes profitability, efficiencies and competition give lenders room to absorb a modest rise.

He said: “A bank tax raid is unlikely to trigger a mortgage rate raid. Banks are highly profitable, have anticipated potential tax increases and are becoming more efficient through AI and technology. Pass it on? Unlikely. 

"Mortgage pricing is driven by swap rates, funding costs and competition, not simply bank taxation. £114 per £100,000? Misleading. It assumes every penny is passed on to borrowers, ignoring profits, efficiencies and competitive pressures. Who suffers? I don't expect any particular borrower group to face a meaningful impact. 

“Copy Spain? No. Competition is a better safeguard than government price controls. Good policy? Yes, if revenues support growth. Banks can absorb a modest levy without penalising borrowers. Let's not confuse a tax on profits with a tax on mortgages.”