Oil at $100 drives mortgage rates back to a month-old high

British business owners hoping the summer would bring cheaper borrowing have been dealt a blow. Average UK mortgage rates have risen back to the level of a month ago, as renewed tensions in the Middle East feed through to lenders and, ultimately, to homeowners.

Lenders’ funding costs have increased as markets conclude that a prolonged conflict reduces the likelihood of interest rate cuts by central banks. The five biggest High Street banks are among a host of lenders that have raised rates on new fixed deals in recent days.

The trigger is oil. Prices hit $100 a barrel on Thursday for the first time since May, after fresh strikes and Houthi militia attacks on oil tankers in the Red Sea reignited fears over global energy supplies. Rates had been falling while a ceasefire between the US and Iran appeared to hold; that optimism has evaporated.

For SME owners, the pain lands twice. Many finance their firms against personal property, or carry residential and buy-to-let mortgages alongside commercial borrowing. The swap rates that drive fixed mortgage pricing also underpin asset finance, overdrafts and commercial loans, so a repricing rarely stops at the front door. It comes on top of an already-subdued market in which high borrowing costs have deterred buyers and dampened activity.

More than eight in 10 mortgage customers hold fixed-rate deals, whose interest does not change until the deal expires, usually after two or five years. The average rate on a new two-year fix is now 5.59 per cent, according to financial information service Moneyfacts. That is the highest since 19 June, though still below the April peak of 5.9 per cent. The five-year average stands at 5.61 per cent, a level last seen on 7 June. HSBC has said it will raise its rates on Monday.

The direction of travel matters well beyond this summer. Bank of England projections suggest just over five million homeowners should expect their monthly repayments to rise by the end of 2028, a reminder that the era of cheap money is not returning quickly. The renewed climb chimes with warnings that a geopolitical shock to energy prices has thrown further cuts into doubt, with the Bank already signalling that cuts are “off the table” for now.

“It will be incredibly frustrating for borrowers to see rates rise back up to where they were a month ago. The positive progress over recent weeks now feels all but lost, but what the market needs is a period of stability,” said Rachel Springall, finance expert at Moneyfacts. She said 100 deals had been pulled temporarily as lenders reconsidered their pricing.

Her advice for anyone facing a remortgage this year is to lock in a deal now with their existing lender ahead of time, while still asking a broker to check whether there is anything better elsewhere. “Brokers are an anchor during turbulent times as they can help borrowers keep abreast of changes and be there step by step when going through a mortgage application,” she said.

Brokers say the reversal shows how quickly sentiment can turn. “Any borrower hoping for rate cuts to become an ongoing trend will need to rethink,” said David Hollingworth, of L&C Mortgages. “Momentum has performed an about turn and now clearly shifted to fixed rates rising in the near term at least.”

For business owners already juggling tight margins and rising costs, the message is a familiar one: plan for borrowing to stay dear, and do not bank on the cavalry of rate cuts arriving on schedule.