Iran War's Impact on UK Mortgages and House Prices: How Long Will It Last?
Interest rates were poised to decline, but now appear set to remain unchanged next week as banks and building societies respond to global financial instability. The Iran war, with its profound effect on energy prices and subsequent inflation spikes, is directly influencing mortgage costs across the Western world. Markets and consumers alike are anxiously questioning the duration of this disruption.
How Severe Is the Current Crisis?
In Britain, this represents the most significant financial turmoil since the notorious Liz Truss "mini-Budget" of September 2022, which unnecessarily triggered market panic. Rather than the gradual interest rate easing that many had anticipated, average mortgage rates have surged past the 5 percent threshold since Donald Trump's military intervention began. Nearly 500 home loan products have been withdrawn from the market.
While this increase should not be overstated—it accounts for approximately 0.3 percentage points in two-year fixed rates and remains far less severe than the Truss episode—concerns persist regarding potential worsening in both finance supply and cost. On the demand side, a further economic slowdown in an economy already flirting with recession could mean reduced earnings growth, critical for mortgage affordability, and potential job losses. If inflation escalates while wages stagnate, repaying any mortgage becomes substantially more challenging.
How Are Lenders Responding?
Historical patterns suggest that banks and building societies will become more selective, demanding larger deposits, higher incomes, and improved credit scores to shield themselves from borrower defaults. This tightening of criteria particularly disadvantages first-time buyers, who once again find themselves in a precarious position.
When Can We Expect Improvement?
The timeline for recovery largely depends on Donald Trump and Iran's new leadership. Should Iran collapse and end the war, or if Trump declares "victory" and Iran resumes oil and gas exports, the crisis could dissipate relatively quickly, though with some residual higher borrowing rates—similar to the post-Truss experience.
However, if the conflict persists and energy costs continue to rise, pushing inflation upward, interest rates may climb further before stabilizing at significantly elevated levels. Once inflation is controlled, rates could gradually decrease. This pattern mirrors what followed Russia's invasion of Ukraine in 2022, when inflation rose from 6.2 percent in February to a peak of 11.1 percent by October. Economists suggest the inflation impact from this crisis may be less severe, potentially adding one to two percentage points to CPI by year's end, though outcomes could vary.
What Lies Ahead?
The Bank of England's Monetary Policy Committee will announce its latest decision on Thursday, 19 March. Given current uncertainties, rates are likely to remain unchanged. Mortgage rates often move faster than the Bank's official policy rate because they are tied to longer-term borrowing periods—10 or 30 years—benchmarked against UK government bonds or gilts. These, in turn, reflect long-term economic prospects, particularly inflation and public finance trajectories.
Unfortunately for UK borrowers, Britain has recently experienced more "domestic" inflation and a stronger wage-price spiral compared to other advanced economies. Persistently low growth also complicates national debt servicing and reduction efforts.
Should You Consider Buying a Home Now?
Purchasing property currently carries risk, at least in the short term. The worst-case scenario involves instability eroding confidence and triggering a slump, including a house-price crash. This could leave borrowers with large, expensive mortgages—often first-time buyers transitioning from previously low rates—facing significantly higher monthly payments and potential negative equity, where mortgage debt exceeds property value.
This negative equity trap, unseen on a widespread scale for years, could be avoided if the war concludes swiftly and energy flows resume. Many are hoping for a "Taco" moment—Trump Always Chickens Out—a pattern observed after capital market crashes following irrational decisions, such as the "Independence Day" trade tariff announcements last April or the threatened Greenland invasion in January. Another Trump reversal might provide much-needed relief.
