The Bank of England has raised interest rates for the first time in more than three years and warned that further increases could follow unless the conflict between the US and Iran is resolved, dealing a fresh blow to mortgage borrowers and the UK housing market.
The Monetary Policy Committee (MPC) increased Bank Rate by 0.25 percentage points, from 3.75% to 4%, on Thursday as policymakers attempt to contain inflation driven largely by rising oil and energy prices.
All nine members of the MPC backed an increase in borrowing costs. Eight voted for a 0.25 percentage-point rise, while one wanted a larger increase to 4.25%.
Bank of England governor Andrew Bailey said higher energy prices justified the decision but stressed that it did not necessarily signal the beginning of a prolonged cycle of interest rate increases.
Bailey said the decision “shouldn’t be seen as the first in an inevitably long sequence of hikes”, but warned “unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase”.
He made clear that developments in the Middle East would be central to future interest rate decisions.
“Put simply, it requires real progress towards settling the conflict in the Middle East,” Bailey said.
The governor acknowledged that he could “see the argument” for another rate increase, before adopting a “more conditional approach, dependent on the evidence on energy prices and inflation dynamics”.
The warning raises the prospect of further increases in mortgage costs at a difficult time for estate agents, with buyer confidence already fragile and housing transactions under pressure.
Higher interest rates will immediately affect homeowners with tracker mortgages linked to Bank Rate. Borrowers on some other variable-rate deals could also face higher monthly repayments.
Those on fixed-rate mortgages will avoid an immediate increase, although buyers and homeowners approaching a new deal face continued uncertainty over borrowing costs.
Lenders may already have priced much of Thursday’s widely anticipated increase into fixed mortgage deals. However, the prospect of further rises could keep mortgage pricing under pressure.
Inflation forces Bank’s hand
The decision follows renewed inflationary pressure, with the Consumer Prices Index (CPI) rising to 3.5% in September, its highest level in 11 months.
That is well above the Bank’s 2% target.
The conflict between the US and Iran has driven up global oil prices, pushing up petrol and diesel costs and adding to wider inflationary pressures.
Household energy bills are also under pressure following Ofgem’s 3.6% increase in the energy price cap on 1 October.
A further substantial rise has been forecast for January, raising concerns that inflation could remain elevated for longer.
The Bank now faces the challenge of containing inflation without inflicting further damage on an already subdued economy and housing market.
Fresh setback for estate agents
The increase comes as the housing market struggles to maintain momentum.
Latest HMRC figures show residential property transactions fell 1% in September to 94,800, down 4% compared with a year earlier.
Zoopla has reported a 15% reduction in purchasing power among mortgage-dependent buyers and expects 100,000 fewer housing transactions in 2026 than last year.
Meanwhile, Savills has downgraded its housing market forecasts, predicting UK house prices will fall by 1.5% in 2027.
The estate agency expects a sustained recovery to be delayed until the second half of 2028, with average mortgage rates unlikely to fall below 5% before early that year.
For agents, the concern is that higher borrowing costs will force more buyers to reduce their budgets, renegotiate offers or postpone moving.
The prospect of further interest rate increases could also put additional pressure on sellers to adjust asking prices to reflect what buyers can afford.
Much will now depend on developments in the Middle East and whether inflationary pressures ease sufficiently to prevent the Bank from raising borrowing costs again.
Property industry reacts:
Nathan Emerson, CEO at Propertymark: “As the Bank of England continues to navigate wider economic pressures, including rising inflation, it comes as little surprise that base rate decisions remain focused on maintaining economic stability.
“While these decisions are never straightforward, the Bank of England must carefully balance the need to control inflation against the wider impact that borrowing costs can have on households.
“Last week’s Autumn Budget acknowledged several important consumer concerns, including rising energy costs and the ongoing challenges facing many first-time buyers. Measures aimed at addressing some of these pressures are focused on stability, particularly where they could help improve access to homeownership and ease the long-term financial burden on households. Over the coming months, much will depend on how inflation and consumer confidence evolve.”
Iain McKenzie, CEO of The Guild of Property Professionals: “An increase to 4% is another reminder that the property market cannot operate in isolation from the wider economy. Higher borrowing costs inevitably influence what buyers can afford, and sellers need to recognise that this places limits on achievable prices.
“However, it’s important not to overstate the impact. The market has continued to function in a challenging financial environment, with transaction volumes holding up relatively well despite higher mortgage rates and economic uncertainty.
“What we’re likely to see is an even greater emphasis on value. With buyers enjoying more choice, sellers who price ambitiously could find themselves waiting considerably longer to secure a sale.
“The most important consideration remains what’s happening on the ground locally. Accurate valuations, realistic expectations and a strong understanding of buyer demand will be essential for anyone looking to sell successfully.”
Amy Reynolds, head of sales at Antony Roberts: “Today’s rate rise has been largely priced in already. Fixed-rate mortgages have been heading towards 6 per cent for weeks, and mortgage approvals have dropped to their lowest level in almost three years.
“The real damage is psychological. Another rate rise tells people that borrowing is getting more expensive, not cheaper, and that makes them hesitate. The people hit hardest are those remortgaging and second-steppers trying to stretch to one more bedroom.
“On the back of this, we expect a quiet December for the housing market and a slow start to 2027. The sellers who still get deals done will be those who price realistically from day one.”
Jeremy Leaf, north London estate agent: “The Bank of England must weigh up concerns about rising inflation as Middle East hostilities show little sign of ending any time soon, against the prospect of choking off any growth in the economy.
Andrew Lloyd, managing director, Search Acumen: “For consumers already limping from years of higher bills, this rate rise is another boot landing. Around 1.8 million fixed-rate mortgages are due to expire in 2026, with a further 2.3 million households facing refinancing in 2027. That is a huge number of households potentially having to recalibrate their finances just as the cost of borrowing starts heading in the wrong direction.
“Five years ago, borrowers were fixing at rates starting with a one. Today, they’re refinancing into rates above five, turning a £781 monthly mortgage payment into £1,188 and adding almost £5,000 a year to household costs. The sting is that mortgage rates remain higher than they were the last time the Bank of England base rate stood at 4%, showing lenders are still pricing in greater risk and uncertainty.”
Nicky Stevenson, managing director of Fine & Country: “Today’s decision to increase interest rates to 4% will undoubtedly be disappointing for buyers who had been hoping for some relief from higher borrowing costs. However, with inflation continuing to prove stubborn, the Bank of England is clearly prioritising getting price pressures back under control.
“For prospective buyers, the message is to be financially prepared rather than put plans on hold indefinitely. Understanding affordability, securing mortgage advice early and allowing some flexibility in monthly budgets will be particularly important in the current environment.
“An increase in Bank Rate doesn’t automatically translate into an equivalent rise in fixed mortgage rates, but it can influence borrowing costs and buyer sentiment.
“People will always need to move home, and while some may choose to reassess their plans, well-priced properties in desirable locations will continue to attract interest.”
Jason Tebb, president of OnTheMarket: “As expected, the Bank of England increased base rate to 4% this month.
“With the rate of inflation rising to 3.5 per cent in the 12 months to September, it seemed almost inevitable that this would force the Bank of England to act. It is the end of the road for the ‘wait and see’ approach which has served the Bank well this year, helping create a steady environment at a time when there has been so much wider geopolitical upheaval.
“If inflation continues to rise, there may well be further rate increases to come, further impacting the affordability of those who might have been planning to move in the new year.
“Serious buyers and sellers continue to engage with each other but with the former having potentially less purchasing power after today’s announcement, the sensible pricing of property coming to market is essential.”
Kevin Shaw, national sales managing director at LRG: “Today’s rise to 4% will come as little surprise. Lenders have largely priced it in already, so the direct effect on mortgage rates should be limited, even if some edge their rates up slightly. The bigger impact is on sentiment, because a rate rise makes the headlines. But it’s a moment in time, not a turning point. We may see one more rise in the early part of 2027, taking rates to 4.25%, but I’d be surprised if they went any higher.
“What the market has now is clarity. The Budget has come and gone without any real curveballs for buyers and sellers, and today’s decision is out of the way. This time last year, the housing market spent much of the final quarter treading water while it waited for the Budget. This year, people know where they stand, and we’re cautiously optimistic about the start of 2027, when we expect the usual seasonal upturn as more buyers return.”
This is a developing story. Further updates and reaction from across the property industry will follow.
