One of Andy Burnham’s leading economic advisers has warned that mortgage rates will rise if the Government does not get a grip on the increasing cost of borrowing.

Lord O’Neill of Gatley, who worked with Mr Burnham for a decade when he was Mayor of Greater Manchester, stressed that Britain was facing an “escalating problem” of rising debt repayment bills hitting the public finances.

He spoke out just hours before Mr Burnham’s debut Prime Minister’s Questions during which the Labour leader sought to blame the rising cost of borrowing and market turbulence on the Tory record on ballooning debt.

Former Goldman Sachs chief economist Lord O’Neill told Times Radio: “Because we borrow so much each year, still we have to service the cost of that, and so each time bond yields rise, the amount of money that Government has to pay back just in interest rate cost goes up as well, and you get into this sort of escalating problem.

“Our own 10-year bond yields are crucial to a number of things in terms of long-term borrowing, not least...mortgage rates.

“So, if they keep going up, mortgage rates are going to go up.”

Rising mortgage rates hit Londoners particularly hard as many of them have taken out large home loans to be able to buy a property in the capital.

The peer, who served as a Treasury minister in David Cameron’s government, said he hoped Mr Burham would be able to tackle the borrowing crisis.

But he suggested he would need to take action on politically difficult issues such as cutting the welfare bill, reforming the “triple lock” for the State pension and “stopping the never-ending rise in health spending”.

He also told how in America, there was a stand-off between its central bank, the Federal Reserve, and the US Treasury which had unsuccessfully “tried to intervene in US bonds last week to keep the yields down”.

Lord O’Neill declined a post in Mr Burnham’s government but made clear he is willing to still offer his economic advice.

Stock prices in London closed lower on Tuesday as government bond yields soared on the back of rising oil prices, increasing the cost of borrowing and reigniting worries over inflation.

Amid a global bond sell-off, the yield on 10-year UK gilts - a loan to the British government - stretched to 5.22% on Tuesday from 5.15% on Friday, while the 30-year hit 5.85%, up from 5.79% on Friday.

The 10-year gilt had earlier traded as high as 5.25%, an 18-year high, and the 30-year at 5.89%, a level last seen in 1998.

The cost of borrowing has hit a level worse than during Liz Truss’ disastrous mini-Budget of September 2022.

Kathleen Brooks, research director at XTB, said the rise in bond yields poses a “major challenge” for the Chancellor ahead of next month’s Budget.

At his first Prime Minister’s Questions, Mr Burnham sought to pin the rising borrowing costs on the Tory record on ballooning debt.

Kemi Badenoch pointed to a warning from Lord O’Neill that the Prime Minister’s tone during his Tuesday Commons debut, where he outlined the direction for his Government, would have unsettled investors.

The Conservative leader said: “Lord O’Neill, a close friend of the Prime Minister, said yesterday’s statement in the Commons was the last thing investors wanted to hear.

“Lord O’Neill is a serious economist. He knows what he’s talking about and, sure enough, yesterday the cost of Government borrowing rose to its highest in 18 years.”

Mr Burnham hit back, taking off the gloves at his first PMQs exchanges: “When they were in Government, we saw 14 years of stagnant growth. We saw 14 years of debt rising as a percentage of GDP.

“I would say to her that the turbulence on global markets are because of that exposure that they left behind.”