Published on April 21, 2026
The outbreak of war in the Middle East—specifically the US‑Israel conflict with Iran beginning on 28 February 2026—has sent shockwaves through global financial markets, and the UK is no exception. The sudden rise in energy prices, turbulence in government bond markets, and surging swap rates have dramatically altered expectations for UK interest rates and, in turn, the outlook for fixed‑rate mortgages.
One of the earliest and most significant impacts of the conflict was the closure of the Strait of Hormuz on 2 March, a route responsible for around 20% of global oil supply. This triggered the largest energy supply disruption on record, pushing Brent crude above $100 per barrel and contributing to rising inflation expectations in the UK.
The surge in oil and gas prices has been compounded by wider commodity disruptions, including fertiliser shortages. These pressures have pushed expected UK inflation for 2026 up to around 4%, compared with previous forecasts of 2.5%.
Higher inflation makes it harder for the Bank of England (BoE) to cut interest rates. Before the conflict, markets priced in an 80% chance of a rate cut at the March 19 meeting, but following the escalation, expectations swung toward a rate hold, with only a 1% chance of a cut.
Government bond markets reacted immediately. UK two‑year gilt yields climbed to 4.129%, the highest level since 2025, as investors reassessed the inflation outlook.
These gilt movements flow directly into swap rates, the financial instruments lenders use to price fixed‑rate mortgages. As swap rates rose sharply, lenders began repricing mortgage products—sometimes with only hours’ notice—reflecting the heightened “geopolitical risk premium.”
This volatility resulted in more than 1,500 mortgage products being withdrawn from the market since early March, equivalent to roughly a fifth of available options.
Mortgage pricing has responded quickly. The average two‑year fixed rate increased from around 4.8% to 5.5%, meaning a borrower with a £200,000 mortgage could pay nearly £1,000 more per year.
Some forecasts suggest mortgage rates could rise as high as 6% if the conflict and energy disruptions persist.
Lenders such as HSBC, Nationwide, and Coventry have already announced increases to fixed‑rate deals, citing funding cost pressures directly linked to the Middle East crisis.
Adding to concerns, by late March the market saw an unusual inversion: two‑year fixed rates rising above five‑year rates, something typically associated with periods of economic uncertainty. The average two‑year fix reached 5.56%, compared with 5.54% for five‑year deals.
The Bank of England is now expected to hold the base rate at 3.75% for much of 2026, with some analysts even seeing the possibility of a rise to 4% if inflation remains stubborn.
Until geopolitical tensions ease and energy markets stabilise, the path toward lower interest rates appears blocked. For homeowners coming off a fixed‑rate deal, this means higher borrowing costs are likely to persist throughout 2026.