UK mortgage rates have come under renewed pressure as financial markets price in a series of potential Bank of England interest-rate rises, Knight Frank analysis shows.
This is despite limited evidence of a fresh inflation surge in the domestic economy, according to Tom Bill, head of UK residential research at Knight Frank.
The five-year swap rate rose above 4.7% on Tuesday, its highest level since September 2023, as worsening security concerns around the Strait of Hormuz triggered fears of higher energy prices.
Swap rates are closely watched by mortgage lenders because they reflect market expectations for future interest rates, Bill said. Movements in swap markets can affect the cost of fixed-rate mortgages even before the Bank of England changes Bank rate.
The latest rise has added to uncertainty over the outlook for borrowers, with markets pricing in several potential rate increases through 2027.
However, the assumptions behind those expectations are increasingly tied to the uncertain trajectory of the conflict in the Middle East rather than clear signs of accelerating UK inflation.
Recent UK economic data has provided little evidence of significant additional inflationary pressure.
Services and core inflation were unchanged on Wednesday, following weaker-than-expected labour market data released a day earlier.
The divergence between relatively soft domestic economic indicators and rising market expectations has left the outlook for fixed-rate mortgages particularly difficult to predict.
Fixed-rate products account for almost 90% of UK mortgage lending, meaning changes in swap rates can have a significant impact on borrowers seeking to buy a property or refinance an existing loan.
Higher borrowing costs have already contributed to weaker housing-market activity and price growth this year. Further increases could put additional pressure on transactions and affordability.
Mortgage lenders have raised fixed-rate pricing in recent days, according to Simon Gammon, managing partner at Knight Frank Finance.
The move has prompted some borrowers to consider tracker mortgages, which typically charge a fixed margin above Bank rate.
With some tracker mortgages currently priced at around 4%, compared with fixed-rate deals at approximately 4.75% or higher, several Bank of England rate increases would be required to eliminate the current gap, Gammon said.
That calculation is particularly significant given the uncertainty surrounding how many rate rises markets ultimately expect to materialise.
Michael Brown, a market analyst, said expectations for five Bank of England rate increases by the end of 2027 appeared difficult to justify based on current conditions.
“A hike in November is plausible, if only to prevent the Bank of England from being seen as ‘behind the curve’ compared to their peers,” Brown said.
He added that energy prices and the possibility of so-called second-round inflation effects — where higher energy costs feed into wages and other prices — would be important factors for policymakers.
The Federal Reserve and European Central Bank have raised interest rates this month, while the Bank of England held Bank rate at 3.75% on Thursday as concerns over economic growth weighed against inflation risks.
Market expectations may also reflect caution following the initial economic impact of the Middle East conflict in March, Brown said. Traders who underestimated the earlier rise in inflation risks may now be pricing in a larger potential shock.
That creates a feedback effect for mortgage borrowers: fears of another inflationary episode can push market rates higher even before there is evidence that the expected inflation has materialised.
The result is an unusually uncertain outlook for mortgage costs.
If tensions in the Middle East ease and energy prices fall, swap rates could retreat. But a sustained rise in oil and gas prices could increase inflationary pressure and make it more difficult for the Bank of England to cut rates.
Other global factors are also influencing borrowing costs, meaning any decline in UK mortgage rates may not fully reverse the recent increases.
For borrowers, the immediate direction of mortgage pricing could therefore depend as much on developments in global energy markets and the Strait of Hormuz as on the next set of UK inflation and employment figures.
The rise in borrowing costs also has implications for the wider economy and government finances, with chancellor John Healey facing additional pressure ahead of next month’s Budget.
