For weeks, markets had anticipated that falling inflation would allow mortgage rates to gradually decline. Instead, rising energy prices and financial market volatility have pushed lenders to reconsider previously planned reductions, leaving homeowners and buyers facing renewed uncertainty.
Rising Swap Rates Disrupt Mortgage Rate Reductions
The main factor behind the pause in mortgage rate cuts is a sharp rise in swap rates, the financial benchmarks lenders use to price fixed-rate mortgage deals. According to Moneyfacts, several lenders have already halted or reconsidered planned reductions after swap rates increased in recent days. These rates reflect expectations in financial markets about future interest rates and inflation, meaning sudden changes can quickly influence mortgage pricing.
Adam French, head of consumer finance at Moneyfacts, explained that developments in the Middle East have driven a surge in oil and gas prices, which in turn has reignited concerns about inflation. As inflation expectations increase, financial markets tend to push swap rates higher, making it more expensive for lenders to offer cheaper fixed mortgage deals.
“For the mortgage market, the impact is almost instantaneous,” French said, noting that some lenders had already paused their planned rate reductions. According to Moneyfacts, fixed mortgage pricing is closely linked to swap rates, meaning market movements can rapidly affect the deals available to borrowers.
Despite the shift, average mortgage rates have continued to edge slightly downward for now. Figures reported by The Independent show that the average two-year fixed homeowner mortgage rate stood at 4.82 per cent on Wednesday morning, down from 4.83 per cent the previous day. The average five-year fixed rate was 4.94 per cent, compared with 4.95 per cent a day earlier.
Inflation Fears Weaken Expectations for Bank of England Cuts
The broader concern driving market volatility is the risk that higher energy prices could push inflation back up. The conflict involving Iran has disrupted global energy markets, with oil and gas prices rising sharply amid fears of supply interruptions.
Crude oil recently climbed above 85 dollars a barrel for the first time since July 2024, while gas prices have nearly doubled as tensions in the region affect key shipping routes. Economists warn that sustained increases in energy prices could feed into higher inflation across the UK economy.
This possibility has forced financial markets to reassess expectations for interest rate cuts from the Bank of England. The likelihood of a reduction in the Bank’s base rate later this month has fallen dramatically in recent days.
Martin Temple, an economist at Leeds Building Society, said financial markets had “significantly reassessed” the chances of a quarter-point cut at the Bank of England’s next meeting. Rising swap rates, he noted, suggest borrowing costs for people remortgaging or purchasing a home could increase in the near term.
Economists say the situation highlights how events far beyond the UK can influence domestic borrowing conditions. As French noted, global geopolitical events move financial markets, those markets influence swap rates, and swap rates ultimately shape the mortgage deals available to borrowers.
