Middle East tensions unsettle UK rate outlook

UK mortgage rates face renewed upward pressure as the conflict in the Middle East pushes up energy prices and unsettles financial markets, reversing part of the recent easing in funding costs for lenders.

“Mortgage rates had been gradually edging down in recent weeks as markets priced in the expectation of Bank of England rate cuts later this year,” said Nicholas Mendes, mortgage technical manager at London broker John Charcol. “However, the conflict in the Middle East has introduced a fresh layer of uncertainty and we’ve seen that feed into financial markets quickly.”

Swap rates – the key benchmark for fixed-rate mortgage pricing – have moved higher over the past week as investors factor in the prospect of more persistent inflation. “Two-year swaps influence pricing for two-year fixed mortgages, while five-year swaps underpin five-year fixes,” Mendes said. “Both have increased compared with where they were a week ago as markets readjust expectations around the path of Bank of England interest rates.”

That shift does not guarantee an immediate rise in mortgage rates but is altering the dynamics of lender pricing, Mendes (pictured right) noted. “In the short term, the biggest factor is uncertainty,” he said. “Financial markets tend to react quickly to geopolitical events and lenders generally become more cautious when funding costs start moving around.

“Many lenders hedge funding in advance, so we do not always see an immediate reaction. But if swap rates remain elevated or volatile we could see some lenders begin to reprice upwards in the coming weeks as those hedges roll off.

“If markets settle and swap rates stabilise, competition between lenders could keep pricing relatively steady. So, in the immediate term, it is more about volatility than a guaranteed direction of travel.”

How will central banks react to the geopolitical tensions?

Oxford Economics’ latest analysis suggests the UK and the Eurozone are particularly exposed to the inflationary impact of an energy shock linked to the Iran conflict, while the US, Japan, Canada, and smaller non-euro European economies are less exposed.

Using the firm’s Global Economic Model, senior economic advisor Michael Saunders (pictured right) highlighted the likely inflation impact later this year. “Energy price assumptions suggest that inflation in Q4 this year for the UK and Eurozone will be roughly 0.5-0.6 percentage points higher than previously expected – a greater impact than elsewhere,” he said.

Saunders cautioned that the length and scale of the energy spike remains highly uncertain. “Our updated assumptions assume the energy price shock is relatively short-lived, but the effects on inflation and risks of second-round impacts will be greater if the conflict is more drawn out,” he said.

Against this backdrop, Oxford Economics expects the Bank of England’s Monetary Policy Committee to hold Bank Rate at its current restrictive level in the near term, delaying the timing and pace of cuts that markets had anticipated earlier in the year. 

What should mortgage borrowers do? 

For the UK mortgage market, the immediate impact is more about volatility than a clear direction of travel. Lenders typically become more cautious when funding costs move quickly, and some may pause rate reductions or withdraw products while they reassess, even if headline pricing does not jump sharply overnight.

For borrowers approaching a purchase or remortgage, Mendes said there is merit in being proactive. “Periods of market volatility can lead to lenders adjusting pricing quickly, so borrowers who are approaching a purchase or remortgage may want to keep a close eye on rates,” he said. “Securing a rate early can provide a degree of protection because most lenders allow borrowers to switch to a lower rate before completion if pricing improves. That flexibility means many borrowers choose to lock something in while keeping their options open.”

Mendes also pointed to early engagement as a way to avoid costly standard variable rates. “For borrowers looking to protect themselves from potential increases, one practical step is to secure a rate early if they are approaching a purchase or remortgage,” he suggested. “Many lenders allow borrowers to lock in a deal several months before completion, which can provide some protection if the market becomes more volatile.”

On the choice between product terms, Mendes urged advisers and clients not to let short-term headlines dictate strategy. “The choice between a two-year or longer fix should not be driven purely by short-term market movements,” he stressed. “It really comes down to personal circumstances, how comfortable someone is with payment certainty, and future plans. Some borrowers value the security of a longer fix, while others prefer the flexibility of a shorter term if they expect rates to fall.”

Beyond immediate product decisions, Mendes argued that regular financial reviews can help households build resilience in an uncertain environment. “More broadly, it’s important to give your finances a yearly MOT,” he said.

“Even if you’re fixed into your mortgage or energy bill, understanding your costs is a huge step in building confidence and control over your finances. It also means when renewal does come around, you’re far better prepared and know exactly what to look out for.”