Homeowners’ choice of mortgage deals has shrunk and interest rates on home loans are expected to rise this week, despite financial markets reacting positively to Donald Trump’s pause on his threat to attack Iranian power plants.
Early on Monday, as the end of a two-day deadline set by Trump for a deal with Iran grew closer, financial market data implied that investors believed the Bank of England will attempt to tackle spiralling prices with four quarter-point increases in rates before the end of December.
After Donald Trump instructed US defence officials to postpone airstrikes against Iranian energy infrastructure for five days, investors reduced the number of rate rises they expect to two quarter-point increases, from 3.75% to 4.25% this year.
However, in what will be a blow to mortgage payers, international investors continued to bet that the UK is vulnerable to a sustained rise in inflation after the US-Israel attack on Iran.
Expectations that the Bank will raise rates several times this year has driven up the cost of fixed-rate mortgages and is having a “catastrophic impact” on the home loans market, the comparison site Moneyfacts said.
The average two-year fixed residential mortgage rate on Monday was 5.43%, up from 5.35% on Friday – the highest level since February 2025, and up from 4.83% at the start of March.
Hundreds of mortgage products have been pulled from the market. There are 6,144 residential mortgage products available, down from 6,659 on Friday.
Last week, the Bank’s monetary policy committee (MPC) left rates on hold but signalled it could be forced to increase borrowing costs in the coming months as the attacks on Iran threatened to drive inflation in the UK above 3%.
Nicholas Mendes, an adviser at the mortgage broker John Charcol, said products would continue to be pulled and there would be “further upward pressure on fixed mortgage rates as lenders try to keep pace with fast-moving markets”.
“Mortgage pricing does not wait for the Bank of England to come to [make up its mind],” he said.
“If markets keep pricing in higher rates from here, lenders are likely to continue repricing in advance.”
Last week the Bank of England governor, Andrew Bailey, suggested the financial markets were getting ahead of themselves in expecting rate rises this year.
Some analysts cast doubt on the likelihood of four rate rises this year. Derek Halpenny, the head of research in global markets for Europe, the Middle East and Africa at MUFG, said the expectation of four rate rises was “overdone”.
Goldman Sachs said UK interest rate rises this year were unlikely. In a note to clients published on Friday, it said: “Our economists now think that the MPC will remain on hold for longer and maintain [the base rate] at 3.75% throughout 2026.”
Nevertheless, investors have rushed to buy safe havenassets, pushing the dollar to fresh highs this year.
Global stock markets swung on Monday and gold dropped, by 6% to $4,218 an ounce, down from almost $5,600 an ounce in late January.
Chris Beauchamp, the chief analyst at the stockbroker IG, said: “Investors who have spent the weekend watching fresh strikes in the Middle East are now waiting to see what will happen when Trump’s 48-hour deadline expires tonight. But they are in no mood to hang around, and have continued to sell stocks and precious metals.
“Each day that the war goes does more damage to the global economy and drives inflation higher, with recession chances rising by the hour.”