The escalating conflict in the Middle East could force an additional 1.3 million UK homeowners to grapple with higher mortgage payments by the end of 2028, according to the Bank of England.
The central bank's latest economic risk assessment warns that global "shocks" stemming from the geopolitical crisis are poised to drive up borrowing costs. Prior to the conflict, analysts estimated that 3.9 million households would see their mortgage costs increase over the next two and a half years. That figure has now surged to 5.2 million.
This dramatic shift in expectations follows a sharp spike in global oil and gas prices, triggered by military actions involving the US, Israel, and Iran over the past month. The Bank's Financial Policy Committee noted that the UK's economic outlook has noticeably "deteriorated," raising fears that sustained energy spikes could reignite inflation and severely squeeze household and business budgets.
Despite the sobering forecast, the Bank emphasized that the projected payment increases should "remain modest" when compared to the severe financial whiplash experienced after the controversial 2022 mini-budget. Furthermore, the UK banking sector has proven highly resilient, successfully absorbing recent market volatility and remaining well-positioned to support consumers even if economic conditions worsen.
Before the current tensions flared, the Bank of England's base interest rate—currently sitting at 3.75%—was widely expected to drop this year. Now, policymakers may be forced to hold rates steady or even enact fresh hikes to combat inflationary pressures. While financial markets are currently betting on two rate increases before the year is out, BoE Governor Andrew Bailey has cautioned that traders might be "getting ahead of themselves."
Lenders, however, aren't waiting around. Mortgage rates have already begun to climb as banks adjust their risk models, quietly pulling some of the market's cheapest deals. According to financial data firm Moneyfacts, the average two-year fixed-rate mortgage hit 5.84% at the start of April, with five-year fixes sitting at 5.75%.
Overall mortgage product availability has also shrunk from roughly 8,500 to 7,000 options. Despite the drop, the Bank noted this inventory remains healthier than the stark shortages seen during the initial Covid-19 lockdowns or the chaotic 2022 gilt market crisis.
The broader ripple effects are already altering the UK housing landscape. Nationwide, one of the country's largest mortgage lenders, recently warned that elevated borrowing and energy costs will inevitably freeze out potential buyers, leading to softened house prices and a significant slowdown in property market activity.