Bank of England Warns 1.3 Million Households Face Higher Mortgage Costs Amid Iran War Shock

The Bank of England has issued a stark warning that the ongoing war in Iran has delivered a “substantial” shock to the global economy, with as many as 1.3 million additional UK households now facing higher mortgage repayments as a direct consequence of the conflict’s financial fallout.

The Bank’s Financial Policy Committee (FPC) has stated that the war will “weigh on growth, increase inflation and tighten financial conditions,” revising its estimate of affected borrowers upward from 3.9 million to 5.2 million by the final quarter of 2028. The scale of this revision reflects the severity with which policymakers are now assessing the conflict’s economic reach.

Mortgage product availability has contracted sharply in response to the turmoil. The FPC identified that lenders have withdrawn approximately 1,500 mortgage products from the market since the United States first launched missile strikes against Iran, as banks reassess their risk exposure in an environment of heightened uncertainty. The average two-year fixed rate mortgage has climbed to 5.84 per cent, up from 4.83 per cent at the start of March, whilst the average five-year fixed rate has risen to 5.75 per cent from 4.95 per cent, according to financial data firm Moneyfacts. These moves reflect growing market expectations that the Bank may be compelled to raise its base rate, currently at 3.75 per cent, in order to contain inflationary pressures driven by surging energy costs.

The FPC, which convened on 27 March, was unequivocal in its assessment of the broader macro-financial environment. “The conflict has made the global environment materially more unpredictable and followed a period in which global risks were already elevated,” the committee stated. It cautioned that the “ultimate impact on financial stability will depend on the duration, scale and repercussions of the conflict, including whether any additional shocks materialise around the same time.”

The ramifications extend well beyond the residential property market. Businesses are now confronting elevated debt servicing costs, with energy-intensive sectors identified as carrying the greatest vulnerability. Manufacturing, transport, agriculture and construction were specifically cited by the FPC as industries most exposed to the current market upheaval. The committee also warned that the conflict has deteriorated the outlook for sovereign bond markets globally, potentially constraining the fiscal space available to governments should further economic shocks emerge.

Against this backdrop of tightening conditions, the Bank has nonetheless pressed ahead with proposals designed to ease access to larger mortgages for prospective homebuyers. The central bank is consulting on reforms to the loan-to-income (LTI) cap, introduced in the aftermath of the 2008 financial crisis, which restricts mortgage lending at 4.5 times a borrower’s income or higher. Under the proposed changes, whilst an overall ceiling of 15 per cent of new mortgages across all banks and building societies would be retained, individual lenders would gain greater flexibility to exceed their own prescribed limits. Since June 2025, lenders have already been permitted to apply to the Bank for authorisation to extend larger loans on a case-by-case basis.

The consultation, open until July, has drawn support from mortgage lenders, most notably building societies that serve first-time buyers. Proponents argue the reform is essential given that house prices remain acutely elevated relative to earnings. Data from the Office for National Statistics indicates that the average house price stood at 7.6 times the average salary in England and six times the average salary in Wales last year, underscoring the affordability constraints that borrowers continue to face regardless of the wider geopolitical turbulence.

The Bank’s dual stance, simultaneously warning of systemic risks whilst advancing structural lending reform, reflects the difficult balancing act facing regulators as geopolitical instability intersects with longstanding domestic housing market challenges. How swiftly and decisively the conflict resolves, or escalates, will likely determine the true extent of the financial damage absorbed by UK households and businesses in the quarters ahead.