Mortgage Market Sees Rapid Withdrawal of Deals as Economic Growth Stalls
Hopes for a steady decline in mortgage rates have collapsed this week, with more than 530 homeowner mortgage deals pulled from the market since Monday. According to financial information website Moneyfacts, this represents approximately 7.5 per cent of available deals, marking the fastest pace of withdrawals since the 2022 mini-budget. The turmoil comes as some average mortgage rates have already broken through the 5 per cent threshold amidst volatile financial markets.
Average Rates Surge to Multi-Month Highs
On Friday, Moneyfacts revealed that the average two-year homeowner mortgage rate had climbed to 5.10 per cent, a significant jump from 4.87 per cent on Monday, reaching its highest point since July 2025. Similarly, the average five-year homeowner mortgage rate rose to 5.19 per cent, up from 4.98 per cent at the start of the week, marking its highest level since April 2025.
Adam French, head of consumer finance at Moneyfacts, commented on the situation, stating that even the cheapest rates are shooting higher. He added: “It’s unwelcome news for borrowers, as hopes of steadily falling mortgage rates have collapsed and given way to a much more uncertain outlook. The destination is now heavily dependent on how global markets and inflation expectations evolve in response to the conflict in the Middle East.”
UK Economy Flatlines in January
The mortgage market turmoil coincides with Britain’s economy unexpectedly flatlining in January, in an already weak start to the year. Official figures from the Office for National Statistics (ONS) showed zero growth in gross domestic product (GDP) in January, against expectations for output to increase by 0.2 per cent. This follows meagre growth of just 0.1 per cent in the final three months of last year amid budget uncertainty and a subdued performance in December.
The worse-than-forecast figures have fuelled fears that soaring fuel and energy prices caused by the US-Israel war with Iran will hit the UK economy hard as it already struggles for momentum. Economists warned that a prolonged conflict and ongoing spike in oil prices – already above 100 US dollars for the first time in nearly four years – could even send the economy into reverse in 2026.
Inflation and Growth Forecasts Under Pressure
Chancellor Rachel Reeves acknowledged the challenging environment, stating that the figures come amid an “uncertain world”, as the Iran war threatens to push up inflation. Independent fiscal watchdog the Office for Budget Responsibility (OBR) warned earlier this week that a sustained spike in energy prices driven by the Middle East conflict could mean UK inflation ends the year one percentage point higher than expected, at close to 3 per cent.
The OBR had already lowered its growth forecast for this year to 1.1 per cent from 1.4 per cent in the recent spring statement, even before the Iran conflict began. Ms Reeves emphasised: “Our economic plan is the right one, but I know there is more to do. In an uncertain world, we are building a stronger and more secure economy by cutting the cost of living, cutting national debt and creating the conditions for growth to make all parts of the country better off.”
Sector-Specific Challenges and Broader Implications
The ONS figures highlighted particular weaknesses in key sectors. Housebuilding saw a tough start to the year, with private housing new work plunging by 5.6 per cent in January – the worst performance since March 2020 at the start of the Covid pandemic. During January, the all-important services sector showed no growth, while output across manufacturing rose by 0.1 per cent, helped by the bounceback in car production following the Jaguar Land Rover cyber attack. Construction overall saw a 0.2 per cent increase. In the three months to January, GDP is estimated to have grown by 0.2 per cent.
Experts suggest that Bank of England policymakers are likely to hold off from cutting interest rates next Thursday despite the UK’s tepid economic performance in recent months. Barret Kupelian, chief economist at PwC, noted: “In calmer conditions, soft growth and a steady fiscal stance would strengthen the case for rate cuts. But central banks do not ease into a fog of geopolitical uncertainty. The case for lower rates is there domestically, but geopolitics may yet delay the verdict.”
Lenders have already been pulling mortgage deals in droves in anticipation of rates staying higher for longer. Some experts have even forecast that the Bank may need to increase rates on the back of the inflation spike caused by the war, further complicating the outlook for borrowers and the broader economy.
