Mortgage Rates Surge Past 5% as Middle East Conflict Disrupts UK Housing Market
The average cost of a two-year fixed rate mortgage in the United Kingdom has surged past the 5% threshold, reaching its highest point in seven months. This significant increase comes as lenders scramble to adjust to economic turbulence triggered by the ongoing conflict between the United States, Israel, and Iran.
Sharp Increases in Fixed Rate Mortgages
According to industry analysts at Moneyfacts, the average two-year fixed mortgage rate has risen to 5.01%, marking the first time it has exceeded 5% since August of the previous year. This represents a dramatic jump from 4.93% recorded just twenty-four hours earlier. Similarly, the average five-year fixed mortgage rate has climbed from 5.03% to 5.09% within a single day.
These escalating rates are directly impacting borrowers, with calculations showing that the increase adds approximately £19 per month, or £228 annually, to the cost of a typical two-year fixed deal compared to pre-conflict levels. Before hostilities erupted, the average two-year fixed rate stood at 4.83%, while the five-year average was 4.95%.
Market Volatility and Product Withdrawals
The turmoil in the mortgage market is further evidenced by a sharp decline in available home loan products. Moneyfacts reports that the number of residential mortgage deals has plummeted, with 164 products disappearing in just one day. Currently, there are 7,164 residential mortgage products available, down significantly from recent figures.
Adam French, head of consumer finance at Moneyfactscompare.co.uk, commented on the situation, stating, "Recent days have been some of the most turbulent in the UK mortgage market since the aftermath of the September 2022 mini-Budget. In the last 48 hours, almost 500 residential mortgage products have been withdrawn as lenders reacted to rapidly rising swap rates."
Underlying Causes: Swap Rates and Inflation Fears
The cost of fixed rate mortgages is intrinsically linked to swap rates, which represent the amount lenders pay to financial institutions for fixed funding. These swap rates have experienced a sharp increase due to the Middle East conflict, driving up mortgage pricing. Compounding the issue, the Bank of England is now expected to postpone a previously anticipated interest rate cut scheduled for next week.
Justin Moy, managing director at Chelmsford-based EHF Mortgages, noted, "This second increase this week has all the hallmarks of a lender that doesn’t want any business for the next few days, as markets settle after a turbulent few days. Most high street lenders have, in the main, had relatively small increases compared to the huge fluctuations in swap rates."
Broader Economic Impact
The conflict's ripple effects extend beyond residential mortgages. Landlords are also facing higher costs, with the average two-year buy-to-let residential mortgage rate rising from 4.66% to 4.74% in the past day. This increase could have implications for rental prices across the UK.
High street bank TSB has been particularly active in adjusting its rates, announcing a further 0.5% increase across its mortgage products after implementing hikes just twenty-four hours prior. This move reflects the broader uncertainty pervading the financial sector.
Furthermore, the conflict has impacted global oil markets, with Brent crude trading at just over $91 a barrel, down from nearly $120 over the weekend but still approximately 30% above pre-war levels. This has contributed to rising fuel prices, adding to the financial strain on consumers.
Future Outlook for Borrowers
With 1.2 million borrowers set to see their fixed-rate deals expire between now and September, the timing of these rate increases is particularly concerning. French added, "It’s unwelcome news for borrowers, as the prospect of falling mortgage rates has quickly given way to rate rises. How far they could go is now heavily dependent on how global markets and inflation expectations evolve as conflict in the Middle East unfolds."
Despite the current volatility, there is some optimism. Moy pointed out that swap rates have begun to fall, suggesting a potential return to stability. However, he cautioned that "for the moment, funding will continue to be troubled on pricing, and lenders will pause or limit their new business." French also indicated that many withdrawn deals are likely to reappear in the coming days and weeks as lenders recalibrate their pricing strategies.
