Key Takeaways
- The Iran war has caused markets to scale back expectations for UK interest rate cuts this year.
- Major UK lenders have begun to increase mortgage rates.
- Futures markets now rule out rate cuts this year, pointing instead to a likely rate increase at some point.
UK mortgage rates have begun to increase as lenders respond to rapidly changing interest rate expectations as a result of the Iran war.
Mortgage providers such as HSBC, Nationwide, and Coventry Building Society have all announced selected fixed-rate increases in recent days, as surging energy prices spark fears of an inflationary shock.
As a major oil and gas importer, the UK is likely to feel the effects of soaring energy prices, which could send inflation higher, economists say. This has caused investors to reevaluate UK monetary policy expectations.
Why UK Mortgage Rates Are Rising
The market’s view on the future path of interest rates has a significant bearing on the rate of mortgage repayments. While variable-rate and tracker mortgages are largely pegged to the Bank of England’s base rate—which was cut twice in 2024 and four times in 2025—fixed-rate products are usually priced off interest rate futures.
Prior to the outbreak of war, mortgage rates had largely been expected to continue on a downward trend in the UK this year. Falling inflation, lower economic growth prospects and rising unemployment had all increased the likelihood of interest rate cuts from the Bank of England.
Markets Reprice Bank of England Interest Rate Expectations
The picture has changed rapidly over the last week, however, with futures markets suggesting there is now a 70% chance of an interest rate rise before the end of the year.
Prior to the conflict, markets had largely priced in an interest rate cut at the next Bank meeting on March 19, with June the next most likely month for a cut. Now futures markets only suggest the likelihood of rate increases at BoE meetings going out to April 2027, with July the most likely, albeit with a near 17% probability.
Matthew Ryan, head of market strategy at global financial services firm Ebury, describes this as “a savage repricing in Bank of England rate expectations”
And Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says this creates a “renewed sense of uncertainty” for the housing market, after mortgage rates had eased dramatically last year following six interest rate cuts since August 2024.
“With some mortgage rate changes already underway, first-time buyers looking to secure a loan—and homeowners needing to refinance an existing product—would be wise to lock in the best deal they can find now,” she says.
“If the Middle East conflict proves short-lived and mortgage rates ease again, brokers can often switch borrowers to a better rate on their product right up until two weeks before their mortgage term starts.”
While first-time buyers and those coming off short-term fixes will have to prepare for slightly higher rates than anticipated, mortgage increases are likely to hit borrowers at the end of five-year fixes, which were secured before the Bank of England began hiking rates following the covid pandemic.
“Many were already bracing for significant increases in their monthly repayments, but these could now be even higher than feared if mortgage rates continue to rise,” adds Haine.
According to Moneyfacts data, the average two-year fixed residential mortgage rate has risen from 4.82% on Wednesday March 4 to 4.84%. Meanwhile, the average five-year fix rose from 4.94% to 4.96%.
Yields on two-year gilts, which are correlated to two-year fixed-term mortgages, continued to sell off on March 9, moving 32 basis points higher to 4.19%.
Shares in UK banks and housebuilders have also fallen since the start of the conflict as investors reprice the likelihood of higher mortgage rates.
What Rising Mortgage Rates Mean for UK House Prices
House prices rose a further 0.3% in February after beginning the year with an 0.8% rise in January, according to Halifax’s latest House Price Index.
Karen Noye, mortgage expert at Quilter, says while the market has enjoyed early momentum this year, the global uncertainty clouds the picture moving forward.
“Although buyer interest has improved on last year, sentiment remains fragile. Global uncertainty could slow the momentum that had been emerging, particularly if markets continue to expect firmer inflation. That would keep mortgage pricing stickier than borrowers hoped, limiting any meaningful uplift in demand,” she says.
“Much now depends on how quickly rate expectations stabilize. If swap rates calm and lenders regain confidence, competition could return, but the outlook is highly sensitive to global events.”
Bestinvest’s Haine adds it is far too early to assess the impact of recent mortgage rate changes on longer-term house price growth.
“The outlook from here will ultimately depend on how long the conflict lasts and its impact on domestic inflation, interest rates and the wider economy,” she says.
