The war in Iran has delivered a “substantial” shock to the global economy that could lead to an additional 1.3 million UK households paying higher mortgage rates, the Bank of England has warned.

Officials at the central bank say the conflict will “weigh on growth, increase inflation and tighten financial conditions”, and could push 5.2 million borrowers on to higher mortgage repayments by the final quarter of 2028, up from a previous estimate of 3.9 million.

The Bank’s Financial Policy Committee (FPC) found that banks were cutting back on mortgage lending by pulling about 1,500 products from the market since America first launched missile attacks on Iran.

Banks have reduced product availability amid fears that interest rates may need to rise from 3.75 per cent to tame higher inflation caused by the sharp rise in energy prices. The average two-year fixed rate mortgage is 5.84 per cent according to Moneyfacts, the financial data firm, up from 4.83 per cent at the start of March. The average five-year fix is 5.75 per cent, up from 4.95 per cent.

“The conflict has made the global environment materially more unpredictable and followed a period in which global risks were already elevated,” the Bank’s committee said.

“The ultimate impact on financial stability will depend on the duration, scale and repercussions of the conflict, including whether any additional shocks materialise around the same time.”

Businesses face higher debt costs, and energy-intensive industries, such as manufacturing, transport, agriculture and construction, were identified as being the most exposed to the market upheaval. The Iran war has also worsened the outlook for sovereign bond markets globally and may limit the ability of governments to respond to any future shocks, according to the committee, which met on March 27.

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Separately, the Bank announced it was pushing ahead with proposals to make it easier for thousands of homebuyers to access larger mortgages, despite a spike in borrowing costs driven by war in the Middle East. The Bank said it would reform a cap on mortgage lending at 4.5 times a borrower’s income or higher introduced after the 2008 financial crisis to guard against too large a build-up of household debt.

While the Bank would keep in place an overall cap of 15 per cent of new mortgages across all banks and building societies, individual lenders would be able to exceed the limit. The Bank promised a review of the cap on larger loan-to-income mortgages last year and since June 2025, lenders have been able to apply to the Bank for permission to agree to larger loans.

The Bank’s proposals, which it is consulting on until July, have been welcomed by mortgage lenders, particularly building societies which lend to first-time buyers, as necessary to help more buyers at a time when house prices remain high relative to wages. The average house price was 7.6 times the average salary in England last year and six times the average salary in Wales, according to the Office for National Statistics.