Mortgage rates had started 2026 on a downward trend but borrowers are being urged to act fast as the Iran conflict threatens to send pricing upwards.
Customers had been benefiting from a mortgage price war towards the end of last year after December’s interest rate cut helped pricing drop below 4% in some cases, “prompting a drop in rates in the build up to the new year”, said MoneyWeek.
Sticky inflation was already putting pressure on pricing but tensions in the Middle East and Iran are providing a “new threat” to mortgages. Last Thursday, the Bank of England once more held interest rates at 3.75%.
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There has been a “vanishing act” in sub-4% mortgages in recent weeks, said Moneyfacts, while average rates have climbed back above 5%.
What determines mortgage rates?
Lenders consider a range of factors when setting their mortgage rates. A big factor is interest rates, set by the Bank of England.
Borrowing “gets cheaper” when interest rates drop, said MoneyHelper, which can “make it easier to find good deals”, but the cost will also rise if interest rates go up.
Another consideration is the cost the banks face for obtaining funds to lend on the financial markets, which is based on swap rates. These are “a contractual arrangement between two parties” involving swapping a set of interest payments for another, said Private Finance, something that happens “over a specific duration”.
Lenders “often see swaps as their cost of funding”, and consequently “they need to make a margin on top of these”. They only impact fixed-rate mortgages, but “the higher the swap rate, the higher the mortgage rate” as a general rule of thumb.
This is where the Iran conflict is having an impact, as there are fears that the closure of the Strait of Hormuz will cause higher oil and gas prices that can “stoke inflation”, said The Guardian. That makes imminent interest rate cuts unlikely, plus the “uncertainty” has already pushed up the money market swap rates.
This will be of “particular concern”, said This Is Money, to the one million households coming to the end of a fixed-rate deal this year as pricing could be more expensive than they are used to.
When will mortgage rates come down again?
Unfortunately, mortgage rates are “more likely” to be going up than down at the moment, said MoneyWeek. Some lenders have even cancelled planned rate cuts or pulled deals from the market entirely.
The good news for current borrowers is that higher pricing won’t affect you “in the short term” until you need to remortgage, said UK Finance. Currently, three-quarters of homeowner mortgages are on a fixed rate.
For those looking for a home loan, said This Is Money, brokers are advising they “lock in a deal as soon as possible to swerve further hikes”.
But the current situation is “unpredictable”, said the HomeOwners Alliance, and “no one knows for sure” what direction mortgage rates will go.
Which mortgage should you choose?
There are two main mortgage products: fixed rates and trackers.
Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, said Money.co.uk. This may sound attractive when rates are low, but “think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge”. Plus, if interest rates go down during the fixed-rate period, your payments won’t.
A tracker mortgage usually follows the BoE’s base rate, and “huge numbers” of people have been on these mortgages “hoping for fixed deals to come down” before they secure their loans, said The Telegraph.
However, there is always the risk that rates will rise even higher, “leaving you gambling if you don’t fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments”, warned Online Mortgage Advisor.
How to boost your chances of getting a mortgage
Lenders will typically use an income multiple of 4 to 4.5 times the salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, said The Times Money Mentor, but you will need to pass tough affordability tests.
This involves examining your income and outgoings. So “the more money you spend each month, the less you might be able to borrow”, the website said.
You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.
These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.
The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. “Usually, a higher score means you’re seen as lower risk,” said Experian.
You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax. Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, “it might be helpful to be selective about what other loan applications you make”.
How to find support if you are struggling
Being in arrears on your mortgage “might sound like a scary term you’d rather not think about”, but it is important to tackle the problem head-on as it “won’t just magic itself away”, added MoneySavingExpert.
The first best step is to contact your mortgage lender as an “urgent priority”, as missing a mortgage payment without notifying a lender risks “starting the clock towards repossession”, the financial website added.
Support available may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments.
You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.
Benefit claimants, such as those on universal credit, may be able to get help with some of their monthly repayments through the government’s Support for Mortgage Interest (SMI) scheme.
However, it may also be useful to reassess finances, for example, by undertaking a budget or checking if you are entitled to any benefits. These are "other ways to ease the financial pressure", said MoneySavingExpert, and worth exploring even if lender help is sufficient.
