How Conflict in the Middle East is Impacting UK Mortgage Rates

The Bank of England’s base rate held fast at 4% at the latest meeting of its Monetary Policy Committee (MPC). Several factors were behind the decision, not least inflationary pressures, but the ongoing conflict in the Middle East is also a variable on policymakers’ minds.

Here we look at why the spiralling hostilities continue to influence the direction of the base rate and whether it’s likely to impact UK mortgage rates going forward.

Why haven’t UK mortgage rates fallen?

Despite inflation in the UK having fallen in the past 18 months, which led to a reduction in the BoE base rate back in April, further decreases have been staggered. In June, the central bank cited the “deeply worrying” conflict in the Middle East as the main reason for a previous rates hold, and no doubt tensions in that part of the world continue to influence its thinking.

While many economists still expect further reductions in the base rate later this year, it’s difficult to predict whether the developing conflict overseas could further delay the MPC’s path to the 3.75% bank rate previously anticipated in the industry.

Given that the base rate is a dominant influential factor used by lenders when setting mortgage rates on their deals, we’ve seen UK mortgage rates fluctuate since the September hold, with some banks raising them and others ushering in reductions.

When will rates begin to fall again?

Given that inflation remains above the government target of 2%, and is often pushed up by a surge in oil prices, it’s possible that ongoing conflict could see rates continue to stagnate. The MPC is closely monitoring developments in the Iran/Iraq situation and will continue to do so in preparation for its next meeting in early November.

As always, global events are difficult to predict, and it’s therefore impossible to know when mortgage rates will fall next. However, the BoE has commented that a softening in the labour market will still likely lead to a gradual fall in interest rates, albeit a slower decline than originally expected.

Lee Trett, director and co-founder of mortgage firms Money Helpdesk and LeadCrowd, believes that geopolitical factors will play a smaller role in the direction of UK mortgage rates than other variables closer to home: “While the MPC are monitoring the global outlook closely, inflation levels will likely be shaped by a slowdown in wage growth and a rise in unemployment in the UK over the coming months. Whether to introduce another rates cut to ease this situation will be a fine balancing act for the MPC while inflation remains above its 2% target,” he explained.

“The situation in the Middle East will, of course, play some role in their decision-making but domestic issues will no doubt take precedence.” 

What could the broader implications be for homeowners?

While it’s difficult to estimate the scale of the impact that Middle Eastern conflict could have on the UK at this early stage, oil prices have already increased significantly. This will likely impact energy prices, and in turn, the prices of goods that require energy to produce, including essentials, such as food.

This could put further financial pressure on households at a time when the cost of living is already stretched for many. Those looking to remortgage may find that their affordability is reduced, leaving them with less competitive rate availability. However, the potential for another increase in property value is also a possibility in a high-inflation environment. If your home should rise in value as a result, you should see an increase in equity. This could balance some of the cost of mortgage interest rates, so it’s important to speak to a broker to ensure you’re getting the best deal for your circumstances.

Should you wait to get a mortgage?

While many prospective first-time buyers will be disappointed to see that mortgage rates remain relatively high, rates are not as high as they have been in recent history. As we’ve seen over the past decade, global events can have a substantial and unavoidable impact on the UK economy, so holding out for the ‘perfect time to buy’ is likely to be a fool’s errand.

Mortgage lenders, while influenced by the base rate of interest, do not set the vast majority of their deals solely based on its movement. There are many other factors considered, as well as their impetus to remain competitive within the property market.

Rates could fall further in the latter months of 2025; however, there is also a chance they will rise. If you’re looking to buy a new home or remortgage your existing one, taking advice from a broker with a good understanding of the market will help ensure you don’t pay more than you need to.