bank of england
The Bank of England said the outlook for interest rates shifted after the conflict in Iran disrupted energy markets.

More than five million homeowners are now on course for higher mortgage bills by the end of 2028, roughly a million more than the Bank of England expected at the turn of the year, after the conflict in Iran upended the outlook for interest rates.

The revision, set out in the central bank's latest Financial Stability Report, lifts a December estimate of four million affected households. The Bank was quick to add a caveat: this squeeze should prove milder than the one delivered during the worst of the recent rate cycle.

A typical owner-occupier moving off a fixed-rate deal over the next two years is likely to see monthly payments climb by about £45 ($60). That is a long way short of the £120 ($160) average increase swallowed by borrowers who signed new deals between the end of 2022 and the close of 2024.

The warning arrives as household budgets are already stretched by higher energy costs, with the same rise in oil and gas prices driving both pressures.

How the Iran War Reshaped UK Mortgage Costs

The trigger was geopolitical rather than domestic. Fighting involving Iran forced the closure of the Strait of Hormuz, the shipping lane that normally carries about a fifth of the world's oil and gas. Energy prices spiked, inflation firmed, and markets began betting that central banks would hold interest rates higher for longer.

Those expectations were passed straight to borrowers. Lenders repriced fixed deals for first-time buyers and remortgaging households alike, and the Bank now puts the average two-year fixed rate, at 75% loan-to-value, at 4.92%, some 0.72 percentage points above the level logged in its December assessment.

It marks a sharp reversal from the start of the year, when easing inflation had pointed to steady rate cuts and cheaper home loans. The closure of the Strait changed that within weeks.

The upshot is that a large group banking on cheaper terms will be disappointed. More than two million people on two-year fixes due to expire by the end of 2028 are now expected to remortgage close to their existing rate, with little movement either way.

Which Homeowners Face the Steepest Mortgage Rises

The burden is anything but evenly spread. The Bank singled out around 750,000 households paying less than 3% interest and due to leave those deals this year. They face an average jump of £170 ($226) a month, the harshest in the report, as some of the cheapest fixed rates in a generation vanish.

Timing is everything, given that more than eight in 10 mortgage customers sit on fixed terms. A fixed rate holds until the deal runs out, usually after two or five years, before a fresh one takes over, so households step onto today's pricing at different moments rather than in a single wave.

Renters and lower-income families are most exposed to the parallel rise in energy costs, the Bank noted, since 'they spend a larger share of their income on essentials, limiting their ability to adjust spending in response to higher prices.' Dearer borrowing and dearer energy together, it warned, 'could place additional pressure on household finances.'

For all that, the wider verdict was one of resilience 'even in a challenging external environment,' with household debt still low by historical standards and unlikely to trigger a sharp retreat in spending.

The report landed alongside a gloomier read on the public finances. In its own Fiscal Risks and Sustainability report, the Office for Budget Responsibility branded the state of the nation's books 'challenging' and warned that debt could almost triple to close to 300% of GDP within 50 years unless governments act.

Simply holding debt at its projected 2030-31 level would demand spending cuts on the scale of the entire education budget, or a year's worth of corporation tax receipts, the watchdog said, adding that 'unsustainable fiscal outcomes that may not occur for some years are today's challenge not tomorrow's.'

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