Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Strategy. Read the original article for full details.
Middle East tensions drive fresh mortgage rate volatility, Knight Frank analysis shows
UK mortgage rates have come under renewed pressure as financial markets price in a series of potential Bank of England interest-rate rises, according to Knight Frank analysis, despite limited evidence of a fresh inflation surge in the domestic economy.
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.
Why swap rates matter for borrowers
Mortgage lenders watch swap rates closely because they reflect market expectations for future interest rates. Movements in swap markets can affect the cost of fixed-rate mortgages even before the Bank of England changes Bank rate.
Markets are currently pricing in several potential rate increases through 2027, but Knight Frank's Tom Bill, head of UK residential research, noted that these assumptions are increasingly tied to the uncertain trajectory of the Middle East conflict rather than clear signs of accelerating UK inflation. Recent data has been relatively soft: services and core inflation were unchanged, following weaker-than-expected labour market figures.
What it means for fixed-rate and tracker products
Fixed-rate products account for almost 90% of UK mortgage lending, so changes in swap rates can significantly affect borrowers buying or refinancing. Higher borrowing costs have already contributed to weaker housing-market activity and price growth this year, and further increases could add pressure on transactions and affordability.
Simon Gammon, managing partner at Knight Frank Finance, said lenders have raised fixed-rate pricing in recent days, prompting some borrowers to consider tracker mortgages, which typically charge a fixed margin above Bank rate. With some trackers priced at around 4% compared with fixed-rate deals at approximately 4.75% or higher, several Bank of England rate increases would be needed to eliminate the gap.
An unusually uncertain outlook
The Bank of England held Bank rate at 3.75% on Thursday, while the Federal Reserve and European Central Bank have raised rates this month. Market analyst Michael Brown said expectations for five rate increases by the end of 2027 appeared difficult to justify on current conditions, though a November hike was plausible to avoid the Bank appearing 'behind the curve'.
The result is an unusually uncertain outlook for mortgage costs. If tensions ease and energy prices fall, swap rates could retreat; a sustained rise in oil and gas prices could increase inflationary pressure and keep borrowing costs elevated.
For letting agents and inventory clerks, mortgage cost volatility may continue to weigh on transaction volumes and affordability in the sales market, with knock-on effects for landlord activity and portfolio churn.
Source: Mortgage Strategy