Mortgage rates in the UK have surged to a seven-month high due to the repercussions of the Iran conflict on borrowers. According to industry experts Moneyfacts, the average two-year fixed-rate mortgage has exceeded 5% for the first time since last August, standing now at 5.01% after a rapid increase from 4.93% within a day. Similarly, the average five-year fixed-rate mortgage has also seen a significant rise, climbing from 5.03% to 5.09% over the same period.
Lenders are swiftly adjusting to the threat of heightened inflation following the US and Israel’s conflict with Iran, leading to the spike in mortgage rates. Meanwhile, motorists are experiencing heightened fuel costs as oil prices surge. Despite Brent crude trading slightly lower at just over $91 a barrel, it remains nearly 30% higher than pre-war levels, causing petrol prices to rise.
RAC’s head of policy, Simon Williams, noted the ongoing financial impact on drivers, with unleaded costs reaching 139p a litre and diesel prices soaring to 155.1p. The escalation in fuel prices is attributed to the current conflict, with diesel witnessing a notable 9% increase since the end of February, now at its highest price since May 2024.
Fixed-rate mortgages are influenced by swap rates, which have surged amid the conflict situation. Furthermore, the Bank of England is anticipated to defer an expected interest rate cut next week, adding pressure on borrowers. Over 1.2 million borrowers are set to see their fixed-rate deals expire between now and September.
Prior to the conflict, the average two-year fixed-rate mortgage stood at 4.83%, while the typical five-year rate was 4.95%. The recent spike has resulted in an additional £19 per month or £228 annually for a standard two-year fixed-rate deal compared to pre-war times.
Additionally, the availability of mortgage products has decreased significantly since the conflict began, limiting options for borrowers. Moneyfacts reports a reduction in residential mortgage products to 7,164, with 164 products disappearing within a day of hostilities. Landlords are also facing increased costs, impacting rental prices, with the average two-year buy-to-let residential mortgage rate rising from 4.66% to 4.74% in the past day.
TSB, a major high street bank, has announced a substantial 0.5% increase in mortgage rates amidst the uncertainty surrounding the Iran conflict. Following earlier rate hikes, the bank revealed further increments across its fixed-rate residential and buy-to-let mortgages, reflecting the turbulent market conditions.
Adam French, head of consumer finance at Moneyfactscompare.co.uk, highlighted the recent upheaval in the UK mortgage market and the withdrawal of residential mortgage products due to rising swap rates. While borrowers face rate hikes instead of anticipated reductions, the future trajectory of mortgage rates hinges on global market dynamics and inflation expectations amid the unfolding Middle East conflict.
Justin Moy, managing director at EHF Mortgages, noted the cautious approach of lenders amidst market volatility, expecting a return to normalcy as swap rates stabilize. However, funding challenges may persist in pricing, prompting lenders to pause or restrict new business activities temporarily.