Fixed mortgage rates across the UK have started creeping upwards, with lenders responding to inflation fears stoked by the ongoing war in Iran. The Bank of England’s decision to hold interest rates at 3.75% is widely seen as a pause before potential hikes later this year.

Inflation Threats Fuel Mortgage Rate Increases

The conflict in the Middle East has sent oil prices surging, pushing energy costs higher in the UK and beyond. That ripple effect is feeding into inflation concerns that lenders say will keep mortgage rates elevated.

Major banks such as HSBC, Nationwide, and Coventry Building Society have already raised fixed mortgage rates in recent weeks. Barclays reported a slump in UK consumer confidence, dropping two points to 23%, as households brace for higher fuel, energy, and food bills.

Barclays’ survey of 2,000 Britons revealed that four out of five are worried the war will push inflation up further, with nearly 60% concerned about its impact on their personal finances. The combination of rising prices and higher borrowing costs is making it tougher for many homebuyers to afford new mortgages.

Bank of England Holds Rates but Signals Possible Hikes

Just weeks ago, markets expected the Bank of England to cut the base rate from 3.75% to 3.5%.

Instead, the Monetary Policy Committee voted unanimously to maintain the current level amid fresh inflation risks tied to the Iran conflict.

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The Bank’s forecasts now suggest inflation could rise to 3.5% in the third quarter of 2026, up from previous estimates of just above 2%. Rising wholesale oil and gas prices, driven by disruptions to key shipping routes like the Strait of Hormuz and attacks on regional facilities, are behind this shift.

Policymakers haven't ruled out raising interest rates if inflation worsens, though they emphasise any hike would be measured rather than sudden. MPC member Catherine Mann noted the balance has shifted away from considering cuts towards holding rates longer or even increasing them.

Homebuilders Watch Market Sentiment Closely

Persimmon, one of the UK’s largest housebuilders, says it's closely monitoring the war's effect on buyer confidence and building costs. It hasn't factored in any mortgage rate reductions or government stimulus in its short-term outlook.

So far, Persimmon expects to complete between 12,000 and 12,500 homes in 2026, slightly up on last year, assuming the conflict remains short-lived. The company reported strong sales in the first nine weeks of 2026, with a 9% increase in net private sales and average prices 6% higher than in 2025.

Still, Persimmon’s chief executive, Dean Finch, highlighted uncertainty over how the Iran war might shift customer sentiment in the months ahead. Building costs could rise if the conflict drags on, though existing supplier agreements and accelerated production are expected to limit immediate impacts.

What This Means for Homebuyers

Affordability is taking a hit from both rising mortgage rates and inflationary pressures. The war-induced jump in energy prices is forcing the Bank to tread carefully but stay ready to act to keep inflation in check.

Aarin Chiekrie, an equity analyst at Hargreaves Lansdown, said the Iran conflict has made rate cuts less likely this year, which won’t help buyers struggling with costs. "It could be a while before external headwinds shift," Chiekrie added.

With interest rates on hold for now but hikes looming, prospective homeowners face a challenging environment. The combination of geopolitical uncertainty and economic pressures means the mortgage market could remain volatile well into 2026.

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The Bank of England’s cautious stance reflects the unpredictable fallout from the Middle East conflict. Whether mortgage rates rise further depends largely on how long inflation stays elevated and how the war evolves. For now, the pause on rate cuts signals tougher times ahead for UK homebuyers.

This article was created with AI assistance.