According to MoneyFacts, the average mortgage rate rose sharply in March, from 4.89% at the start of the month to 5.50% as of March 25. This increase has pushed up the cost of borrowing, with the typical annual repayment on a £250,000 loan over 25 years rising by more than £1,000.
The current rate is the first time since August 2024 that the average has reached 5.50%, although market conditions vary. At the time, the Bank of England base rate was high and inflation was low, with expectations that rates would begin to fall.
While mortgage rates remain below their recent peak of 6.52% due in August 2023, the latest increase reflects new pressure on borrowing costs amid ongoing uncertainty around inflation and interest rate expectations.
UK inflation stood at 3% in February, according to the Office for National Statistics, above the Bank of England’s 2% target and unchanged from the previous month.
Economists had expected inflation to begin to ease in the spring, but rising geopolitical risks – particularly the impact of the conflict in Iran on global energy markets – have increased uncertainty around the outlook. Higher fuel costs could impact household bills and food prices in the coming months.
Some forecasts now suggest that inflation could rise again under more adverse conditions later this year, pointing to the possibility of continued pressure on energy and supply chains.
Adam French, head of consumer finance at MoneyfactsCompare, said: “Moneyfacts’ average mortgage rate has reached 5.50% – a height last seen more than 18 months ago, marking another unwelcome milestone for borrowers this month. These rising costs are in direct response to the conflict in the Middle East, which has dramatically changed market expectations around inflation and future interest rates, with lenders maintaining rising funding costs. Struggling to keep up.”
He said, “While a quick resolution of the conflict in the Middle East could ease upward pressure on rates, some inflation already exists, the reality is that a more unstable world is a more expensive world.” “Even though the most competitive deals will remain below average, anyone looking to buy or take out a mortgage this year will need to be prepared for significantly higher costs than before.”
As borrowing costs come under pressure, questions are being raised about whether the Bank of England’s aggressive stance is sustainable.
Tom Bill, head of UK residential research at Knight Frank, said: “Almost four weeks into the Middle East conflict, the Bank of England risks fighting its inflation battle on the wrong front.
“As oil and natural gas prices have risen, financial markets have bet that central banks will need to raise rates to control inflation.”
Many economists expect the Bank of England to raise rates twice this year, a marked change from the position at the end of February, when the rate was cut twice by financial markets.
Bill added, “The Bank may be spooked by memories of double-digit inflation in 2022 and 2023, when it was arguably too slow to act. However, the underlying economic conditions are different today, which means raising rates may be the wrong move.”