For months, UK homebuyers and remortgagers have been riding a wave of optimism as the Bank of England steadily cut interest rates, bringing the base rate down to 3.75% by December 2025. But that era of declining borrowing costs appears to be over.
Major lenders are hiking mortgage rates amid persistent inflation, energy price volatility, and escalating geopolitical tensions in the Middle East, effectively closing the door on ultra-cheap deals that defined the post-pandemic recovery.
The shift comes as the Bank of England (BoE) held its benchmark rate steady at 3.75% in its first meeting of 2026, a decision that split the Monetary Policy Committee (MPC) in a close 5-4 vote.
While some members pushed for a quarter-point cut, the majority opted to pause, citing risks from higher-than-expected inflation, which stood at 3.4% in December 2025. The BoE now projects inflation will return to its 2% target by spring 2026, but warns that external shocks could derail this path.
Uncertainty from the Middle East
Central to this abrupt reversal is the escalating conflict in the Middle East, particularly the US-Israeli military actions against Iran that have triggered sharp surges in global oil and gas prices. the most severe energy shock since Russia’s invasion of Ukraine in 2022.
Lenders and markets have reacted swiftly: swap rates, which underpin fixed mortgage pricing, have climbed significantly as investors price in prolonged higher energy costs that could reignite inflation and force the BoE to delay or abandon further rate cuts—or even consider hikes.
Major players, including Nationwide (up to 0.25% on some products), HSBC UK, and Coventry Building Society, have already announced increases on fixed deals, with brokers warning more lenders will follow suit amid the ‘chaos in the Middle East’, driving up funding costs.
Halifax, Britain’s largest lender, has explicitly cautioned that geopolitical uncertainties could keep mortgage rates ‘higher for longer’ by stoking inflation and reducing expectations for near-term BoE easing.
As of early March 2026, the average two-year fixed residential mortgage rate has climbed to around 4.84%, while five-year fixes sit near 4.96%, according to recent broker and lender data. Two-year tracker rates, which follow the base rate, remain slightly lower but have also edged higher as lenders pull back from aggressive discounting.
“The expectations of multiple rate cuts in 2026 have evaporated,” said Paula Higgins, CEO of the HomeOwners Alliance. “With borrowing costs remaining elevated due to these global shocks, affordability will continue to squeeze first-time buyers and those rolling off low-rate deals.”
Market forecasts have soured dramatically
Traders who once priced in multiple BoE cuts by year-end now anticipate just one, or possibly none, as the energy price surge threatens to push inflation higher and keep rates elevated.
Some economists still see potential dips toward 3% by late 2026 if the conflict proves short-lived and prices stabilize, but others warn of rates hovering around 4% or climbing further if the energy shock persists.
The impact on the housing market is already evident. House prices rose modestly in recent months, but analysts warn that persistent high rates could cap growth at 2-4% for the year.
For the roughly 800,000 households whose fixed-rate mortgages (often at 3% or below) expire annually through 2027, the pain is acute. Remortgaging at current levels could add hundreds of pounds to monthly payments.
Prospective buyers are also proceeding with caution amid the uncertainty.
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