The average mortgage rate has climbed sharply in March, rising from 4.89% at the start of the month to 5.50% by 25 March, according to Moneyfacts. This increase has pushed up borrowing costs, with the typical annual repayment on a £250,000 loan over 25 years rising by more than £1,000.
The current rate marks the first time since August 2024 that the average has reached 5.50%, although market conditions differ. At that point, the Bank of England base rate was higher and inflation was lower, with expectations that rates would begin to fall.
While mortgage rates remain below their recent peak of 6.52% in August 2023, the latest rise reflects renewed pressure on borrowing costs amid ongoing uncertainty around inflation and interest rate expectations.
UK inflation held at 3% in February, according to the Office for National Statistics, remaining above the Bank of England’s 2% target and unchanged from the previous month.
Economists had expected inflation to begin easing in the spring, but rising geopolitical risks—particularly the impact of conflict in Iran on global energy markets—have increased uncertainty around the outlook. Higher fuel costs could feed through into household bills and food prices in the coming months.
Some forecasts now suggest inflation could rise again later this year under more adverse scenarios, reflecting the potential for sustained pressure on energy and supply chains.
Adam French, head of consumer finance at Moneyfactscompare, said: “The Moneyfacts Average Mortgage Rate has hit 5.50% – heights last seen more than 18 months ago, marking another unwelcome milestone for borrowers this month. These rising costs are in direct response to the conflict in the Middle East which has dramatically shifted market expectations around inflation and future interest rates, with lenders scrambling to keep up with rising funding costs.”
“While a quicker resolution to the conflict in the Middle East could ease pressure on rates, some inflation is already baked in, the reality is that a more volatile world is a more expensive world,” he added. “Even though the most competitive deals will remain below average, anyone looking to buy or remortgage this year needs to prepare for substantially higher costs than previously expected.”
As upwards pressure grows on borrowing costs, there are questions over whether the Bank of England’s hawkish posture is sustainable.
Tom Bill, head of UK residential research at Knight Frank, said: “Almost four weeks into the Middle East conflict, the Bank of England risks fighting its own inflation battle on the wrong front.
“As oil and natural gas prices have surged, financial markets have bet central banks will need to raise rates to control inflation.”
Many economists expect the Bank of England to increase rates twice this year, which is a notable shift from the position at the end of February, when two cuts were priced in by financial markets.
“The Bank may be scarred by the memories of double-digit inflation in 2022 and 2023, when it was arguably too slow to act. However, underlying economic conditions are different today, which means raising rates could be a misstep,” Bill added.