What the latest Middle East escalation could mean for mortgage rates
OpinionThe renewed fighting in the Middle East is a reminder of just how fragile the situation remains, and we are far from out of the woods. Even if Donald Trump’s actions are somewhat reined in after. . .
OpinionThe renewed fighting in the Middle East is a reminder of just how fragile the situation remains, and we are far from out of the woods. Even if Donald Trump’s actions are somewhat reined in after November’s US midterm elections, that still leaves 2 and a half years of unpredictable US policy ahead, with no clarity yet on what could follow. Oil prices, which had fallen back from more than $100 a barrel to around $70 before the latest escalation, have jumped sharply and are now trading at around $78 a barrel. That matters because oil feeds into the cost of almost everything, from fuel to food to manufacturing, so a sustained rise pushes inflation back up. Markets have reacted accordingly, with Government borrowing costs rising and share prices falling. This is significant for mortgage borrowers because fixed mortgage rates are not priced directly from the Bank of England base rate, but from swap rates, which reflect what lenders expect will happen to interest rates over the next 2, 5 or 10 years. Swap rates move in line with Government borrowing costs, known as gilt yields, since both are driven by the same expectations around inflation and future interest rate decisions. When swap rates rise, it becomes more expensive for lenders to fund fixed-rate deals, and that cost typically gets passed on to borrowers through higher rates on the high street. A cut to the Bank of England base rate this year already looked off the table once the war began. The longer hostilities continue, the greater the risk of renewed inflationary pressure, which increases the chance that the Bank of England ends up raising rates rather than cutting them. The Bank’s next decision is not until 30th July, and a lot could change before then. However, as things stand, a rate rise at that meeting, or the following one on 17th September, is looking increasingly likely. The recent run of lenders cutting their mortgage rates is likely to come to a pause. Anyone thinking about locking in a new fixed-rate mortgage should consider acting sooner rather than later. For borrowers with a fixed rate ending in the next 6 months, it is worth reviewing options now rather than waiting, as many lenders allow you to secure a new rate in advance and switch to a cheaper one later if rates fall before your current deal ends. Those further out from renewal should keep a close eye on developments over the coming weeks, as the picture could shift quickly depending on how the conflict progresses. Given how much is moving at once, including geopolitical risk, oil prices, swap rates and the Bank of England’s next move, speaking to a broker is the best way to understand how these factors apply to your specific circumstances and to make sure you are not caught out by a sudden rate change. Nicholas Mendes is mortgage technical manager at John Charcol