Bank of England warns 1.3m households face higher mortgages due to Iran war

The Bank of England has warned that around 1.3 million more households in the UK face a rise in mortgage costs following the economic “shock” caused by the conflict in the Middle East.

The bank’s latest financial stability report (FSR) said the UK economic outlook was “deteriorating” and increasing pressure on UK households and businesses.

It comes as Sir Keir Starmer warned that the coming weeks “will not be easy”, adding that “how we emerge from this crisis will define us for a generation”.

Oil and gas prices have risen sharply since the conflict between US-Israeli forces and Iran began in late February, while stock markets have also been hit by significant volatility.

“The shock will suppress growth, increase inflation and tighten financial conditions,” according to the report.

However, the central bank’s financial policy committee said the UK financial system was “so far resilient”.

But the global macroeconomic environment has become more unpredictable in the wake of the conflict, and this comes at a time when global risks are “already elevated”, the report added.

The prime minister, who held a press conference in Downing Street to address the cost of living issue caused by the war, signaled that the government would try to establish stronger relations with the EU as part of its attempt to alleviate the effects of the conflict.

Sir Keir said the “volatile” international situation caused by the US-Israeli conflict with Tehran meant Britain’s “long-term national interests require closer partnership with our allies in Europe and the European Union”.

He added: “As the Chancellor rightly points out, Brexit has caused profound damage to our economy and the opportunities to strengthen our security and reduce the cost of living are too great to ignore.”

Meanwhile, Rachel Reeves insisted that any livelihood support offered by the government would be based on household income and rejected a commitment to provide immediate support to drivers amid rising fuel costs.

“I want to learn from the past because when Russia invaded Ukraine the richest and best-off third of households got more than a third of the support. That makes no sense,” the chancellor told the BBC on Tuesday.

“This increases the likelihood of large, frequent and potentially overlapping shocks and periods of intense volatility,” the Bank of England report said.

Experts at the bank stated that there is a risk that the pressure on the global economy could lead to the crystallization of “multiple vulnerabilities” at the same time.

This will have a growing impact on financial stability and “the provision of vital financial services to households and businesses in the UK”.

The report highlighted that UK households will face greater financial pressure following the conflict due to rising energy prices and rising mortgage rates.

Last month, the Bank’s monetary policy committee kept the UK interest rate, which largely affects mortgage rates offered by lenders, at 3.75 per cent, but hinted they may lift this in the future due to inflationary pressures.

For this reason, banks significantly increased the mortgage loan interest rates they offered and withdrew many products from the market.

Average rates for two-year fixed-rate mortgages increased by about 0.8 percentage points, while five-year fixed-rate mortgages saw an increase of about 0.7 percentage points, FSR said.

Current rates suggest around 5.2 million UK mortgage holders could face an increase in their repayments by the final quarter of 2028.

This compares with an estimate of 3.9 million in the Bank’s previous report, before the start of the conflict in the Middle East.

The bank added that typical increases in mortgage payments “will remain modest” compared to many of the increases seen in recent years.

The bank also reported that the total number of mortgage products available in the UK fell from 8,500 to 7,000.

However, this is still higher than the period following the initial Covid-19 period and the gilded period of market stress amid the Liz Truss government’s 2022 mini-budget.