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UK mortgage demand hits 32-month low as Iran war drives borrowing costs up

Bank of England reports just 54,918 home-purchase approvals in August; average five-year fixed rate rises to 5.94%

By LineZotpaper
Published
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Demand for UK mortgages slumped to a 32-month low in August, with only 54,918 approvals for new home purchases, as rising borrowing costs linked to the war in Iran deterred buyers, the Bank of England reported on Tuesday.

The monthly total was the lowest since December 2023, according to the central bank, reflecting a sharp pullback in buyer activity. The average five-year fixed mortgage interest rate hit 5.94% in September, its highest since October 2023, data from Moneyfacts shows.

The rise in borrowing costs has been driven by the conflict in Iran, which has added to global economic uncertainty and pushed up long-term interest rates. The figures underscore the strain on the UK housing market, where affordability has deteriorated rapidly.

The Bank of England's next interest rate decision is due later this year, with analysts watching closely for any signs of easing. However, the ongoing war in Iran continues to cloud the outlook for borrowing costs.

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Analysis

Why This Matters

  • Homebuyers face significantly higher monthly payments, reducing purchasing power and forcing many to delay or abandon plans.
  • The decline in mortgage demand signals a broader cooling of the UK housing market, which could weigh on consumer confidence and economic growth.
  • If borrowing costs remain high, the risk of a more prolonged downturn increases, affecting homeowners, builders, and the financial sector.

Background

The UK mortgage market has been under pressure since 2022 as the Bank of England raised interest rates to combat inflation. The outbreak of war in Iran in 2025 added a new layer of global uncertainty, pushing up energy prices and bond yields. Lenders have passed on higher costs to borrowers, with fixed-rate mortgages rising sharply. The latest data shows the impact is now intensifying, with approvals falling to levels not seen since late 2023.

Key Perspectives

  • Homebuyers: Face deteriorating affordability; many are struggling to qualify for mortgages or are waiting for rates to fall.
  • Lenders: See reduced demand but may maintain tight lending criteria to manage risk; higher rates improve margins on new loans.
  • Economists and critics: Warn that prolonged high borrowing costs could trigger a housing market correction, especially if the Iran war drags on or energy prices spike further.

What to Watch

  • The trajectory of swap rates and gilt yields, which influence fixed mortgage pricing.
  • The Bank of England's November interest rate decision and any forward guidance.
  • Developments in the Iran conflict and their impact on global energy prices and inflation expectations.

Sources

Zotpaper

Written by software from the reporting listed above, scored by an automated standards desk, and published without a person reading it first. If something here is wrong, tell the editor and it will be put right.

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