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Middle East war drives UK mortgage costs higher
The Bank of England has warned that 1.3 million UK homeowners could face increased mortgage payments by the end of 2028 as a direct consequence of the ongoing conflict in the Middle East.
Economic shockwaves from the conflict
The Bank's latest risk assessment report highlights that the war has sent ripples through the global economy, pushing up borrowing costs. A total of 5.2 million households are now expected to see their mortgage expenses climb within the next two and a half years-up from the 3.9 million projected before the conflict escalated.
While the Bank describes the anticipated increases as "modest" compared to recent spikes-such as those following the 2022 mini-budget-the broader economic outlook has "deteriorated" due to the crisis.
Energy prices and inflation fears
Since attacks between the US, Israel, and Iran began a month ago, oil and gas prices have surged, while the cost of government borrowing has also risen. The Bank's Financial Policy Committee cautions that these pressures could dampen economic growth and fuel inflation, placing additional strain on UK households and businesses-particularly if elevated energy and mortgage costs persist.
Despite these challenges, the Bank maintains that the financial system, including major banks, has remained "resilient," absorbing significant market volatility since the conflict's onset. It asserts that the UK banking sector would continue to support households and businesses "even if economic and financial conditions were to be substantially worse than expected."
Interest rates and mortgage market shifts
Before the conflict, the Bank of England had been gradually reducing interest rates, which influence mortgage pricing, with further cuts anticipated this year. However, the prospect of sustained inflation driven by rising energy costs has altered expectations. Financial markets now anticipate two interest rate hikes in 2026, though Bank Governor Andrew Bailey told Reuters that such predictions may be premature.
Mortgage rates have already climbed in recent weeks as lenders adjust to shifting market conditions. Some of the most competitive mortgage deals have been withdrawn, and the average rate for a two-year fixed mortgage reached 5.84% on 1 April, while five-year fixed deals averaged 5.75%, according to financial data provider Moneyfacts.
The Bank noted that while the number of available mortgage products has dropped from around 8,500 to 7,000, this remains higher than during previous economic crises, such as the 2022 gilt market turmoil following the Liz Truss budget or the early months of the COVID-19 pandemic.
Housing market braces for impact
Nationwide, one of the UK's largest mortgage lenders, warned on Tuesday that the conflict's economic fallout would likely weigh on house prices. Higher energy and borrowing costs, it said, would reduce affordability for prospective buyers, dampening activity in the housing market.
The Bank of England echoed this sentiment, stating that while mortgage payment increases would be "modest" compared to recent years, most borrowers were already on higher rates, limiting the shock of further adjustments.
