The Bank of England has warned that the escalating conflict in the Middle East could push mortgage costs higher for millions of UK households, as rising energy prices and financial market volatility feed through into borrowing costs.
In its latest Financial Stability Report, the Bank’s Financial Policy Committee (FPC) said the Iran conflict represents a “substantial” global economic shock that is already tightening financial conditions and increasing inflationary pressures.
The committee estimates that an additional 1.3 million households could face higher mortgage repayments as a result, on top of those already affected by previous interest rate rises.
According to the FPC, around 5.2 million borrowers are now expected to be paying higher mortgage rates by the end of 2028, up from a previous forecast of 3.9 million before the latest escalation.
While the Bank noted that the increases may be less severe than the sharp rises seen in recent years, the cumulative impact is likely to place further strain on household finances, particularly when combined with higher energy bills.
The number of mortgage products available has also declined, falling from around 8,500 to 7,000 since the conflict began, indicating tighter lending conditions and reduced choice for borrowers.
The warning reflects the broader economic impact of rising oil and gas prices, which have surged following disruption to global supply routes.
The FPC said the upheaval in energy markets is likely to weigh on economic growth, increase inflation and reduce the scope for interest rate cuts, a combination that could prolong pressure on both households and businesses.
“The global environment has become materially more unpredictable,” the committee said, adding that the ultimate impact will depend on how long the conflict persists and whether additional shocks emerge.
The report also highlights risks to corporate borrowers, particularly in energy-intensive sectors such as manufacturing, transport, agriculture and construction, where rising costs are already squeezing margins.
Higher borrowing costs are expected to add further pressure, potentially leading to increased financial distress in vulnerable industries.
At the same time, the Bank flagged concerns about the resilience of parts of the financial system, particularly the rapidly growing private credit sector.
The collapse of Market Financial Solutions earlier this year was cited as an example of the vulnerabilities within non-bank lending markets.
The FPC pointed to issues including high leverage, weak underwriting standards, limited transparency and optimistic asset valuations, warning that these factors could amplify risks in a downturn.
Investor sentiment towards riskier credit markets had already been deteriorating before the latest geopolitical shock, the report noted.
Despite the heightened risks, the Bank said the UK’s core banking system remains well capitalised and capable of supporting households and businesses, even under more severe economic conditions.
Stress tests conducted by the central bank indicate that recent market movements remain within the range of scenarios banks are expected to withstand.
The Bank’s warning underscores the interconnected nature of global events and domestic financial conditions.
For homeowners, the prospect of higher mortgage costs adds to an already challenging cost-of-living environment. For businesses, rising energy and financing costs threaten to slow investment and growth.
As the conflict continues, the key variables will be the trajectory of energy prices and the broader response of financial markets.
For policymakers, the challenge will be managing inflation without further constraining growth, while ensuring the financial system remains resilient in the face of mounting uncertainty.
