Mortgage bills could jump by over £3,000 a year in worst-case ‘Trumpflation’ scenario

The cost of mortgages has increased since the start of the conflict as lenders have anticipated that interest rates will not fall as previously expected

Mortgage bills could jump by over £3,000 a year in a worst-case scenario if costs keep rising due to the Iran war, according to new analysis.

The conflict has sent mortgage costs rising as lenders have anticipated that interest rates will not fall as previously expected.

Moneyfacts has now analysed the Bank of England’s recent stress test scenarios where it calculated how much inflation could rise by.

In the best-case scenario, where inflation peaks at 3.6% this year and falls below 3% next autumn, Moneyfacts says homeowners would pay between an extra £150 to £1,050 a year.

In a middle scenario, where inflation peaks at 3.7% and stays higher, the extra cost for mortgage holders would be £1,050 to £1,950 a year.

But in the worst-case scenario, where inflation hits 6.2%, the data shows households could pay an extra £3,380 a year.

Moneyfacts analysis shows the average two-year fixed rate has jumped from 4.83% at the start of March to 5.77% now.

The average rate for a five-year deal has gone up from 4.95% to 5.68% over the same period.

Adam French, Head of Consumer Finance at Moneyfacts, said: “The Bank of England’s ‘Trumpflation’ stress scenarios lay bare just how damaging the economic repercussion of the Iran conflict could become.

“At one end, a relatively benign path would see energy prices ease quickly, with inflation peaking at around 3.6% before falling back below target next year.

“At the other, a prolonged period of elevated oil prices could drive inflation as high as 6.2%, forcing a much more aggressive response from the central banks rate setters.“

In its latest report, the Bank of England said average monthly payments are expected to rise by approximately £80 over the next three years.

About 53% of UK mortgage holders are expected to see their payments rise, but around 25% of those who fixed at higher rates should see their payments fall. More than seven million homeowners have a fixed-rate mortgage.

Mr French urged borrowers to consider locking in a new mortgage deal now as “insurance” in case of future rate rises.

Most lenders allow you to secure a new rate up to six months before your current fixed rate expires. He said: “If rates rise, you’re protected and if they fall, you can often switch to a cheaper deal before the new one begins.

“It’s also worth speaking directly to your broker or lender about flexibility options, such as extending the mortgage term to reduce monthly repayments, although this will increase the total interest paid over the lifetime of the loan.

“In a volatile market, being proactive and keeping options open can make a meaningful difference to borrowing costs.”