Warning: Iran war 'shock' could push up mortgages for 1.3m homeowners

Warning: Iran war 'shock' could push up mortgages for 1.3m homeowners

The Bank of England has indicated that approximately 1.3 million homeowners in the UK may experience increased mortgage payments by the end of 2028 due to the ongoing conflict in the Middle East.

In its most recent report evaluating economic risks, the Bank noted that borrowing costs are expected to rise in response to the "shock" experienced by the global economy.

Currently, around 5.2 million households are projected to face increases in mortgage expenses in the next two and a half years—this is a significant rise from the 3.9 million projected before the onset of the conflict.

Nevertheless, the report suggests that the magnitude of these increases will likely be "modest" when compared to the spikes seen in recent years, notably following the mini-budget in 2022.

Following the commencement of US-Israel attacks on Iran a month ago, there has been a notable surge in oil and gas prices, which, in turn, has elevated government borrowing costs.

The Financial Policy Committee of the Bank has cautioned that these developments could negatively impact growth and contribute to inflationary pressures, asserting that the UK's economic outlook has "deteriorated" as a result.

Moreover, it has been highlighted that sustained higher energy and mortgage costs could place additional strain on UK households and businesses.

Despite these challenges, the Bank maintains that the financial system, including banks, has demonstrated "resilience thus far," managing to withstand significant market fluctuations since the conflict began.

The committee has expressed confidence that the UK banking system can continue to provide support to households and businesses, even in scenarios where economic and financial conditions worsen considerably.

Prior to the conflict, interest rates set by the Bank of England—which influence borrowing rates for homebuyers—had declined over the past year and were expected to decrease further this year.

However, with rising energy costs potentially driving up prices, there exists a likelihood that interest rates could remain unchanged at their current level of 3.75% or possibly be increased as the Bank seeks to curb inflation.

Financial markets are currently factoring in two anticipated interest rate increases this year; however, Bank governor Andrew Bailey indicated to Reuters on Wednesday that he believes markets may be "getting ahead of themselves."

In recent weeks, mortgage rates have risen as lenders adjust to new expectations, resulting in the withdrawal of several of the most competitive mortgage deals.

As of April 1, the average rate on a two-year fixed mortgage is 5.84%, according to financial information service Moneyfacts, while the average for a five-year fixed deal is 5.75%.

The Bank of England has observed a decrease in the total number of available mortgage products in the UK, which has fallen from approximately 8,500 to 7,000. Despite this reduction, the current number remains higher than during previous economic strains, including the 2022 gilt market turmoil following the Liz Truss Budget and the initial Covid-19 lockdown.

The Bank noted that typical increases in mortgage payments are expected to be "modest in comparison to those experienced in recent years," as most borrowers are already aligned with higher rates.

One of the UK's largest mortgage lenders, Nationwide, has warned that house prices will likely be influenced by the ongoing conflict. The increased costs associated with energy and borrowing will make home purchasing more challenging, potentially dampening activity within the housing market.