Mortgage borrowers could face a sharp rise in repayments if inflation accelerates with worst-case scenarios pointing to annual costs increasing by more than £3,000.
Analysis from Moneyfacts highlights the potential impact of the Bank of England’s latest stress scenarios, which model how inflation and interest rates could evolve amid ongoing geopolitical tensions.
The data shows mortgage rates typically sit around 1.5 to 1.75 percentage points above base rate, meaning any sustained rise in interest rates could quickly feed through to borrowing costs.
Under a central scenario, where inflation remains elevated for longer, mortgage rates are expected to hold between 5.5% and 6.0%, keeping annual repayments around £1,000 to £2,000 higher than pre-conflict expectations.
HIGHER MORTGAGE RATES
However, in a more severe scenario, where oil prices remain above $120 and inflation peaks above 6%, base rate could rise towards 5.25%, pushing mortgage rates close to 6.75%.
On a typical £250,000 mortgage over 25 years, this would increase annual repayments to more than £20,700, a rise of around £3,380 compared to pre-conflict levels.
Even in a more benign scenario, where inflation peaks at around 3.6% before easing, borrowers are still likely to face higher costs, with mortgage rates expected to remain above pre-conflict levels.
The findings show how sensitive the mortgage market remains to inflation expectations, energy prices and global events, with pricing continuing to move ahead of central bank decisions.
BUYER AFFORDABILITY
The potential increase in borrowing costs could weigh on buyer affordability and transaction volumes, particularly among first-time buyers and those coming off fixed-rate deals.
At the same time, the uncertainty is prompting borrowers to act earlier, with many looking to secure rates in advance to protect against further rises.
Adam French (main picture, inset), Head of Consumer Finance at Moneyfacts, says: “The Bank of England’s ‘Trumpflation’ stress scenarios lay bare just how damaging the economic repercussion 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 banks rate setters.
“The difference between those paths is brutal.”
“For borrowers, the difference between those paths is brutal. In the more optimistic scenario, mortgage rates could settle in the 5.0–5.5% range, limiting the increase in repayments to roughly £150–£1,050 a year on a typical £250,000 loan versus pre-conflict levels.
“The Bank’s central case, where inflation proves stickier and energy costs fall more slowly, suggests a ‘higher for longer’ environment, with mortgage rates holding roughly where they are now at 5.5–6.0% and annual costs running £1,050–£1,950 above pre-conflict expectations.”
WORST-CASE SCENARIO
And he adds: “The real danger for those needing to borrow or refinance is in the worst-case scenario. If oil prices remain above $120 and inflation surges, base rate expectations could move sharply towards 5.25%. Historical analysis shows mortgage rates typically sit around 1.5 to 1.75 percentage points above Base Rate, which would put average borrowing costs over 6.5%. That would translate into an increase of more than £3,000 a year for many borrowers – a devastating hit to affordability.”
CAUTIOUS BUYERS
Mary-Lou Press, President of NAEA Propertymark (National Association of Estate Agents), says: “Confidence in the housing market is highly sensitive to expectations around mortgage costs, with even small shifts in sentiment influencing whether buyers proceed or pause.
“Affordability calculations are now central to almost every transaction, with buyers increasingly cautious and reassessing budgets multiple times before making offers.This is particularly evident among first-time buyers, where changes in monthly repayments can quickly alter purchasing decisions.
COOLING EFFECT
And she adds: “There is also a growing tendency for buyers to move early to secure mortgage deals ahead of uncertainty, rather than waiting until existing products expire.
“However, where confidence weakens, transactions tend to slow, with longer decision-making times and increased risk of fall-throughs.
“It is not only actual rate movements but expectations of future costs that are shaping activity. In this environment, uncertainty around inflation and interest rates is having a direct cooling effect on market momentum and housing mobility.
“Regionally, this varies, with some areas showing greater resilience in demand while others are more sensitive to shifts in affordability and buyer confidence.”
