Moneyfacts analysed the Bank of England’s stress scenarios regarding the conflict, saying this would mean oil prices remaining above $120, inflation peaking at 6.2%, and the base rate rising to 5.25%.
The firm said that looking at historical trends over the last 30 years, mortgage rates typically sat 1.5-1.75 percentage points above the base rate. In the worst-case scenario, average mortgage rates would be around 6.75%, adding thousands of pounds to household bills.
For someone borrowing £250,000 over 25 years, this would result in an additional £3,380 per year in mortgage repayments.
In the central case, energy prices could fall more slowly, with inflation peaking at 3.7% and staying higher for longer. Markets believe this is the most likely outcome, which will see mortgage rates stabilise at their current levels with modest upward pressure.
The most favourable outcome would see energy prices falling quickly and inflation peaking at 3.6% this year, before falling below 3% by autumn 2027. This would cause mortgage rates to decline sooner.
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|
Scenario |
Inflation outlook |
Energy/oil assumption |
Base rate implication |
Estimated mortgage rate |
Monthly repayment (£250,000/ 25 years) |
Annual cost |
Change vs pre-conflict |
|
Pre-conflict baseline |
2% trajectory |
Lower, stable |
3.75% (with cuts expected) |
4.89% |
£1,445.50 |
£17,346 |
— |
|
1 May |
Rising |
Oil elevated |
3.75% (no expectation of cuts) |
5.66% |
£1,559.20 |
£18,710 |
+£1,350 / year |
|
Scenario A (benign) |
Peaks 3.6%, falls <3% |
Prices fall back |
Stability with cuts sooner |
5-5.5% |
£1,460-1,535 |
£17,500-18,400 |
+£150-1,050 / year |
|
Scenario B (central) |
Peaks 3.7%, stays elevated |
Elevated for longer and slower decline |
Higher for longer |
5.5-6% |
£1,535-1,610 |
£18,400-19,300 |
+£1,050-1,950 / year |
|
Scenario C (worst case) |
Peaks 6.2% |
Oil >$120 sustained |
Up to 5.25% |
6.75% |
£1,727
|
£20,724 |
+£3,380 / year |
Borrowers can limit some of the repayment pain
Adam French, head of consumer finance at Moneyfacts, said the Bank of England’s ‘Trumpflation’ stress scenarios laid bare “just how damaging the economic repercussion of the Iran conflict could become”.
French said the difference between each scenario was “brutal” for borrowers, adding: “In the more optimistic scenario, mortgage rates could settle in the 5-5.5% 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% and annual costs running £1,050-1,950 above pre-conflict expectations. This is largely what the market currently expects with the swap rates that underpin fixed mortgage costs stabilising around a percentage point higher than before the conflict.”
French said the worst-case scenario was the real danger for people needing to borrow or refinance, as the extra cost would be a “devastating hit to affordability”.
He said borrowers could still limit some of the damage by securing a new deal up to six months before their current one ended, protecting them if rates did rise.
“In a volatile market, being proactive and keeping options open can make a meaningful difference to borrowing costs,” French added.
