Fixed mortgage rates hit three-year high as Iran war lifts costs

The average cost of a five-year fixed mortgage in the UK has reached 6%, its highest level in three years, as the economic shock from the war in Iran feeds through to household finances. The average two-year fixed deal is just below that, at 5.98%. The shift matters because nearly a third of UK homes have a mortgage, around seven million households.

Since the United States and Israel launched attacks on Iran at the end of February, instability in the Middle East has pushed up energy prices. That has added pressure to inflation, government borrowing costs and the borrowing costs faced by banks and building societies. The Bank of England has not changed its base rate, but fixed mortgage rates have risen by more than a percentage point. Markets now expect interest rates to stay higher for longer, and lenders have repriced deals repeatedly, in some cases several times in a week.

More than five million households are expected to see their mortgage payments rise within the next two years. That is about one million more than the Bank of England expected before the war began. For the roughly 750,000 households coming off a five-year fixed deal in the next month or so, the average monthly increase could be around £170. Someone moving from a rate of about 2.5% to 6% could face low hundreds of pounds a month in extra payments, depending on the size of the loan. A typical new mortgage adds about £171 a month in repayments.

Banks and building societies write around 2.5 million mortgage deals each year. The minority, around 700,000, are for buyers. The majority are existing homeowners refinancing. Mortgage approvals fell 16% in August compared with a year earlier, to a near three-year low. Rental inflation is just below 4%, less than half the level seen a couple of years ago, which offers some relief. Diesel and energy costs are adding to wider cost of living pressure.

The pressure is not confined to the UK. Mortgage rates in the United States have also soared. Borrowers there are more protected by longer terms, but first-time buyers and people wanting to move are still hit hard, and opinion polls suggest voters are increasingly pointing at President Trump.

Oil is starting to move through the Strait of Hormuz again, with more activity than six months ago, but much of the change is happening off grid through satellite transponders, so called dark exports. Pipelines in the UAE and Saudi Arabia are bypassing the strait. Saudi flows collapsed when the war began, recovered a little during peace moves, fell back, and have now started to recover under US military convoys. Some experts think total Middle East energy exports are back near average 2025 levels. Even so, the market has kept oil above $100 because questions remain about whether these flows can last. The route is risky, the Houthi war in Yemen continues, and Saudi energy infrastructure has been damaged.

The Bank of England has warned it may need to raise borrowing costs further if inflation and energy costs stay high. The Prime Minister has pledged to kickstart house building and announced a help to buy style scheme to help first-time buyers. But the mortgage repricing adds pressure to a government that wants a cost of living budget. Some commentators argue the country is caught in a debt spiral and see little short-term relief for borrowers. For anyone worried about their next deal, the practical message from the market is to understand their budget, watch a fast-moving market and seek professional advice.