UK mortgage rates climb as oil spikes hit rate cut hopes
Renewed Middle East conflict has driven UK mortgage rates back to a one-month high, illustrating how geopolitical energy shocks continue to threaten European expectations for interest rate relief.
UK lenders have raised the cost of new fixed-rate mortgages to their highest level in a month following a surge in oil prices. The five largest High Street banks are among the institutions that have increased borrowing costs as fresh Middle East tensions reshape market expectations for central bank rate cuts.
Oil prices hit $100 a barrel on Thursday for the first time since May. This jump, triggered by Houthi militia attacks on Red Sea oil tankers and the collapse of a US-Iran ceasefire, immediately filtered into financial markets. Investors scaled back bets on interest rate reductions, driving up the funding costs that banks pay to finance new home loans.
The average rate on a new two-year fixed mortgage now stands at 5.58%, according to financial information service Moneyfacts. Five-year fixed deals average 5.6%. While these figures remain below the 5.9% peak seen during the height of the Iran war in April, the recent upward trajectory has forced lenders to temporarily withdraw around 100 deals from the market to recalculate their pricing.
More than eight in ten UK mortgage customers hold fixed-rate deals that typically last two to five years, meaning the immediate pain is concentrated on those currently remortgaging. However, the broader economic drag is building. Bank of England projections indicate that just over five million homeowners will see their monthly repayments increase by the end of 2028 as they are forced onto new, higher rates.
The reversal ends a period of regular rate declines through June and early July that had offered hope to households. "It will be incredibly frustrating for borrowers to see rates rise back up to where they were a month ago. The positive progress over recent weeks now feels all but lost, but what the market needs is a period of stability," said Rachel Springall, a finance expert at Moneyfacts.
She advised those needing to remortgage soon to secure a deal with their existing lender early, while also consulting a broker. "Brokers are an anchor during turbulent times as they can help borrowers keep abreast of changes and be there step by step when going through a mortgage application," she said.
The sudden shift serves as a warning to the wider European market about the fragility of the anticipated rate-cutting cycle. "Any borrower hoping for rate cuts to become an ongoing trend will need to rethink," said David Hollingworth of L&C Mortgages. "Momentum has performed an about turn and now clearly shifted to fixed rates rising in the near term at least."
