Warning Iran war 'shock' could push up mortgages for 1.3m homeowners

About 1.3 million UK homeowners may face higher mortgage payments by the end of 2028 as a result of the war in the Middle East, the Bank of England has said.

The Bank's latest report into the risks facing the economy found borrowing costs were likely to rise as the result of the "shock" to the global economy.

A total of 5.2 million households now face increases in mortgage costs in two and a half years' time, compared to the 3.9 million expected when forecasts were made before the conflict.

However, the report said the scale of those increases would "remain modest" compared with those in recent years, such as after the mini-budget in 2022.

Since the US-Israel attacks on Iran began a month ago, oil and gas prices have increased sharply and the cost of government borrowing has risen.

The Bank's Financial Policy Committee warns this could affect growth and may push up inflation, saying that the UK economic outlook had "deteriorated" as a result.

It also said this would increase pressure on UK households and businesses, particularly if higher energy and mortgage costs were "sustained".

However, the Bank said the financial system, including the banks, had been "resilient so far" with the markets absorbing some "very large moves" since the conflict began.

The committee said it believed the UK banking system would be able to support households and businesses "even if economic and financial conditions were to be substantially worse than expected".

Before the conflict, interest rates set by the Bank of England - which underpin borrowing rates for homebuyers - had fallen over the course of last year and had been expected to fall further this year.

However, the prospect of higher prices, pushed up by rising energy costs, means interest rates could remain on hold at their current 3.75% or even be raised again as the Bank aims to head off higher inflation.

Mortgage rates have already risen over the last month as lenders adjust to the change in expectations.

Some of the cheapest mortgage deals have been withdrawn.

The average rate on a two-year fixed deal on 1 April is 5.84%, according to financial information service Moneyfacts. For a five-year deal, the average is 5.75%.

The Bank of England said the total number of mortgage products available in the UK had fallen from around 8,500 to 7,000, but that was still higher than during previous times of economic pressure, including the 2022 gilt market stress after the Liz Truss Budget and the initial Covid 19 lockdown, it said.

Typical increases in mortgage payments would remain "modest in comparison to those experienced in recent years, as most mortgagors were already on higher rates" the Bank said.

One of the UK's largest mortgage lenders, Nationwide, warned on Tuesday that house prices would be affected by the conflict.

The impact of higher energy and borrowing costs would be to make it harder to afford to buy a house, Nationwide said, reducing activity in the housing market.