Mortgage rates have increased weekly for the first time since Easter, a development that could affect the political climate as parties prepare for potential electoral shifts. Analysis from financial comparison site Moneyfacts indicates that 13 major lenders have raised borrowing costs, driven by renewed fighting in the Middle East that has heightened inflation fears.
This rise in rates, coupled with increasing energy bills, comes at a time when official figures show households are struggling financially. In England and Wales, 11,871 individuals entered insolvency in June, a 16% increase from the same month last year, according to recent data.
Moneyfacts reported that the average new mortgage rate climbed from 5.42% to 5.46% over the past week. For two-year fixed deals, the average rate rose from 5.46% to 5.5%, and for five-year offers, it increased from 5.48% to 5.52%.
Adam French, head of consumer finance at Moneyfacts, stated that disruptions in shipping routes like the Strait of Hormuz have led investors to anticipate higher inflation and interest rates for a longer duration, thereby increasing funding costs for lenders. He noted that "This leaves lenders with little choice but to reprice products, even if the Bank of England hasn’t changed the Base Rate. A more volatile world is a more expensive world, and recent months and years are clear evidence that borrowers cannot simply assume mortgage rates will continue moving in one direction."
The conflict in the Middle East has significantly impacted the mortgage market. Prior to the conflict's escalation in late February, the Bank of England had been considering interest rate cuts as inflation eased. However, the war disrupted oil and gas supplies, leading to higher fuel and energy prices and consequently faster inflation. This halted expectations of rate cuts and led to predictions of multiple Bank of England rate hikes this year.
These shifting rate expectations prompted lenders to withdraw competitive deals. While a ceasefire and a subsequent deal between the U.S. and Iran had temporarily eased oil prices and cooled inflation fears, the recent resumption of fighting has reignited these concerns. Markets now perceive a higher likelihood of two Bank of England rate hikes this year. Lenders including NatWest, Barclays, and Nationwide have recently increased their rates.
This trend emerges as the economy grapples with sluggish growth and fears of stagflation, a combination of stagnant gross domestic product and rising inflation. Figures released this week indicated that Britain's economic growth was only 0.1% in May.
Sonia Jordan, president of insolvency specialists R3, commented on the rise in personal insolvencies, stating it "demonstrates the acute pressures on household finances." She added that the increase in the energy price cap from this month "will add further pressure to already stretched budgets."