Households could see mortgage costs drop £100 a month by the end of the year if the ceasefire in the Middle East holds, according to projections by economists.
On Tuesday (7 April) evening, US President Donald Trump and Iran’s supreme national security council confirmed a two-week ceasefire, with shipping allowed through the Strait of Hormuz, a key choke point for oil.
Leading economic forecaster Capital Economics said there were “significant hurdles to overcome” before a ceasefire agreement could translate into a lasting end to the war, but that if it did hold, it moved the situation closer to its “baseline” assumption, where oil prices drop and inflation peaks at around 4.5 per cent.
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Mortgage rates have been rising in recent weeks due to expectations that the rising price of oil could push the Bank of England to raise interest rates.
If the ceasefire does hold, Capital Economics’ modelling suggests average mortgage rates for those with 25 per cent deposits could fall from their current level of 5 per cent to around 4.3 per cent at the start of 2027.
For someone buying a home with a £250,000 mortgage, that could translate to a £100-a-month drop in bills, compared to current pricing.
While this is some good news for the Prime Minister, who has put reducing the cost of living at the heart of his agenda, it would still be worse than the projected situation before the war. But it does avoid a more adverse scenario of which forecaster Capital has produced modelling for.
It looked at what would happen if the conflict is prolonged for at least another three months in an intense phase, and Brent crude – a commonly traded type of oil – stays above $100 per barrel this year and in 2027.
Capital Economics said that in a scenario where the Strait remained closed for several months, inflation could climb to 7 per cent and the UK could experience a recession. It said that the Bank of England could raise interest rates three times to 4.5 per cent and mortgage rates would likely go even higher.
Ruth Gregory, deputy UK chief economist at Capital Economics, said: “There are significant hurdles to overcome before the ceasefire agreement between the US, Israel and Iran can translate into a lasting end to the war. But if it were to hold, it would move outcomes closer to those envisaged in our baseline scenario.
“In our baseline scenario, Brent averages around $95 per barrel in the second quarter of the year before easing towards $80 per barrel by the final quarter.”
Keir Starmer was in the Gulf on Wednesday in a bid to shore up the ceasefire. His most immediate concern will be efforts to keep the Strait of Hormuz open. 20 per cent of the world’s oil is shipped through the waterway, which Iran has effectively blockaded – leading to higher petrol prices and threatening to push up the cost of food, as well as interest rates and mortgages.
Daisy Cooper, Liberal Democrat Treasury spokesperson, told The i Paper that the Government “cannot just cross its fingers and hope for stability abroad” and urged ministers to cut household costs with emergency measures to ease travel costs.
“Trumpflation is pushing household budgets from pillar to post, with higher fuel and mortgage costs,” she said.
“[The Government] must redouble its efforts to improve our national and economic security through a better relationship with Europe, whilst taking up our Lib Dem proposals for emergency cuts to reduce petrol prices by 12p a litre, cap bus fares at £1, and slash costs for rail tickets and EV charging too.”
If the ceasefire continues, quoted average mortgage rates could start dropping within weeks, from 5 per cent currently to 4.4 per cent in December, and 4.3 per cent in January.
Chris Sykes, property finance specialist at MSP Financial Solutions, said there was “definitely room for margins to reduce from lenders”.
“Lenders have increased margins because of uncertainty and timescales, with some lenders taking nearly 20 working days to review an application due to volume of applications submitted in a short space of time. As we see timescales under control hopefully we see lenders being more competitive with each other again.”
Adam French, head of consumer finance at Moneyfacts, said: “If the ceasefire holds, rates could drop a decent enough amount by the end of the year, just not as far they would have been expected to drop to pre-conflict.
“I wouldn’t expect to see many chunky cuts in the short term, but a few lenders keen to bring in customers may act sooner.”
Brokers also warned that despite the optimism, many households coming off fixed-rate deals – particularly those signed five years ago – would likely see their bills shoot up.
According to Capital Economics’ figures, average quoted mortgage rates ranged from around 1.3 per cent and 1.6 per cent in 2021, so even if rates dropped to closer to 4 per cent in the coming months, they would still experience far higher costs.
These costs will also be higher than they expected before the war in the Middle East begun.
Elliott Culley, director of Switch Mortgage Finance, said: “We are now coming to the tail end of clients who still have rates beginning with a 1. Rates increasing now will unfortunately mean higher costs for them unless there are some significant changes.”
David Hollingworth, associate director at L&C Mortgages, added: “If the spike in rates continues it will be bad news for all mortgage borrowers but it could hardly come at a worse time for those borrowers reaching the end of an ultra-low rate. Shopping around and taking advice to try and keep on top of what’s happening will be the best approach as there’s still many ways that this could play out.”
Around 550,000 people took out five-year fixed mortgage rates in 2021 according to UK Finance figures, and many will be coming up to remortgage this summer.
You can usually only lock in a new mortgage fix three to six months before your current deal ends, depending on your lender, so many of those with deals ending in summer or autumn will be watching rates closely, hoping they don’t rise further before they can lock in new deals.