Banks and building societies have taken more than 600 mortgages off the market in the three weeks since the Middle East conflict began. Rates are at their highest in more than a year and interest rates of less than 4 per cent have almost entirely disappeared.
Before the start of the Iran war, there were expectations that the Bank of England base rate would be cut to 3.5 per cent this month, with a further drop to 3.25 per cent later in the year. Now, hopes of any cuts have disappeared and the Bank’s monetary policy committee held the rate at 3.75 per cent on Thursday.
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Mortgage rates are based on where Bank rate is expected to be in the future.
The average two-year fixed rate is 5.32 per cent, the highest since April last year, according to the financial data firm Moneyfacts, and up from 4.83 per cent at the start of March. Monthly repayments on a £200,000 25-year mortgage would be £1,207 at 5.32 per cent but £1,149 at 4.83 per cent. The average five-year fixed rate is 5.37 per cent, its highest since August 2024.
Adam French from Moneyfacts said: “Nine days ago borrowers could choose from hundreds of fixed rates below 4 per cent, but that has now dwindled.
“The financial effects of ‘Trumpflation’ are already hitting home as the conflict in Iran drives concerns about inflation. That has pushed borrowing costs higher and prompted lenders to remove and reprice deals at speed.”
The number of mortgages disappearing from the market is similar to what happened after the Conservative government’s disastrous mini-budget in 2022, when the announcement of billions of pounds of unfunded tax cuts spooked financial markets. Some leading lenders have increased rates multiple times within days.
The rises will be a blow to the 1.2 million or so homeowners who are on fixed deals that will end in the next six months, according to the Financial Conduct Authority (FCA), the City regulator. Those borrowers had been watching rates fall for more than a year, but that has all changed.
So what should they do, and how bad could things get? Here’s what you need to know.
Why are mortgage rates going back up?
Deals were taken off the market or repriced because of a sharp rise in swap rates after the US and Israel launched attacks on Iran on February 28. Swap rates are the rates at which banks lend to each other and are based on expectations of where the Bank of England base rate will be in the future. Lenders use them to price fixed rate mortgages.
Then banks increased rates to avoid having the most competitive deals at a time when a huge number of homeowners are trying to secure a new deal before they become too expensive.
One senior source at a high street mortgage lender said that there were a record number of loan applications across the market last week. He said: “Some customers are asking if it’s worth paying an early repayment charge because of how rates are going up.”
Aaron Strutt from the mortgage broker Trinity Financial said lenders would struggle to cope with the rush of business. “Banks and building societies have had a huge number of applications as brokers rush to secure their clients cheap deals. Some lenders have potentially had a week’s worth of business in a day or two, which means that their service standards are slipping.”
How bad could things get?
In the four weeks after the mini-budget on September 23, 2022, the average two-year fixed rate rose from 4.74 per cent to 6.65 per cent. The average five-year fixed rate went from 4.75 per cent to 6.51 per cent on October 20, according to Moneyfacts. The number of deals on the market fell more than 1,000.
“But we are some way off the worst of 2022 with average mortgage rates at just over 5 per cent now, compared with well over 6 per cent then,” said Mark Harris from the mortgage broker SPF Private Clients. “There are also some considerably cheaper rates available.”
The lowest rate now is a two-year fix at 4.01 per cent from HSBC at 60 per cent loan-to-value (LTV), which means you need a 40 per cent deposit. There is a £999 fee. For someone remortgaging, the best two-year fixed rate is 4.14 per cent from HSBC with the same fee and up to the same maximum LTV.
Strutt said: “Rates are still not that high, even with all these price rises, but they could keep going up. The mortgage acceptance criteria is still the same and lenders are still keen to attract borrowers.”
The extent of any further rate rises depends on how quickly banks and building societies can clear their backlog of applications and how much more business they want. And whether there is any sign of an end to the conflict in the Middle East.
What you can do
You can often lock in a new rate up to six months before your fixed-term deal is due to end, and still switch if a better one comes along. If rates keep rising, a new deal gives you certainty over what your repayments will be. Check any product transfer deals available from your lender, as existing customers can get preferential treatment and avoid further affordability checks.
“Borrowers should take action and secure a rate now if they will need a mortgage in the next six months,” said Harris.
If you are more than six months away from your deal ending, think very carefully before agreeing to pay an early repayment charge so you can switch. This could cost you more than anything you save on your new deal.
Once an application is approved it usually stands for six months, and you can often apply for an extension if, for example, you need more time to complete your purchase.
While most borrowers take out fixed-rate mortgages, Strutt said that more could be tempted by tracker deals while fixed rates keep rising. The rates on trackers move in line with the Bank rate and typically come with no early repayment charges. They are often chosen by those who are planning to move soon.
The lowest tracker rate is a two-year deal at 0.19 percentage points above Bank rate — so 3.94 per cent at the moment — from Nationwide Building Society. It has a £999 fee and is available at up to 60 per cent LTV.