Mortgage bills could increase by more than £3,000 per year in a worst-case scenario if costs continue to rise due to the Iran war, according to new analysis. The conflict has driven mortgage costs upward as lenders anticipate that interest rates will not fall as previously expected.
Analysis of Stress Scenarios
Moneyfacts has analysed the Bank of England's recent stress test scenarios, which calculated potential inflation rises. In the best-case scenario, where inflation peaks at 3.6% this year and falls below 3% next autumn, homeowners would pay between an extra £150 and £1,050 per year. In a middle scenario, where inflation peaks at 3.7% and remains higher, the additional cost for mortgage holders would range from £1,050 to £1,950 per year. However, in the worst-case scenario, where inflation reaches 6.2%, households could face an extra £3,380 per year.
Current Mortgage Rate Trends
Moneyfacts data shows the average two-year fixed rate has jumped from 4.83% at the start of March to 5.77% now. The average rate for a five-year deal has increased from 4.95% to 5.68% over the same period.
Adam French, Head of Consumer Finance at Moneyfacts, commented: "The Bank of England's 'Trumpflation' stress scenarios lay bare just how damaging the economic repercussions of the Iran conflict could become. At one end, a relatively benign path would see energy prices ease quickly, with inflation peaking at around 3.6% before falling back below target next year. At the other, a prolonged period of elevated oil prices could drive inflation as high as 6.2%, forcing a much more aggressive response from the central bank's rate setters."
Impact on Homeowners
In its latest report, the Bank of England stated that average monthly payments are expected to rise by approximately £80 over the next three years. About 53% of UK mortgage holders are expected to see their payments increase, but around 25% of those who fixed at higher rates should see their payments fall. More than seven million homeowners have a fixed-rate mortgage.
Mr French urged borrowers to consider locking in a new mortgage deal now as "insurance" against potential future rate rises. Most lenders allow you to secure a new rate up to six months before your current fixed rate expires. He said: "If rates rise, you're protected and if they fall, you can often switch to a cheaper deal before the new one begins. It's also worth speaking directly to your broker or lender about flexibility options, such as extending the mortgage term to reduce monthly repayments, although this will increase the total interest paid over the lifetime of the loan. In a volatile market, being proactive and keeping options open can make a meaningful difference to borrowing costs."
