A prolonged Middle East conflict could drive up mortgage costs by £3,380 a year for the typical homeowner, fresh analysis suggests.

The conflict has driven up oil prices and the price of a barrel of brent crude is sitting at around $110, up from $72 at the end of February. 

Higher oil prices tend to feed through into higher inflation, as they increase the cost energy, transport and manufacturing.

There are now concerns that the Iran war's impact on inflation could be worse than previously expected.

The Bank of England held interest rates at 3.75 per cent last week for the third time in a row, partly in a bid to head off an inflation spike. 

Traders no longer expect any interest rate cuts in 2026, with the general consensus being that the central bank will need to raise them later this year.

When interest rates rise, fixed mortgage rates usually go up as well.  

The worst case scenario: A £3,380 rise

Last week, the Bank of England published three hypothetical 'stress test' scenarios, showing where it thinks inflation and mortgage rates could end up depending on how the conflict plays out. 

Its worst case scenario would see oil prices remain above $120 and inflation peak at 6.2 per cent.

If that happens, the base rate could move sharply from 3.75 per cent today, back towards 5.25 per cent.

According to further analysis by rates scrutineer Moneyfacts, this in turn could push average mortgage rates towards 6.75 per cent, up from 4.89 per cent prior to the conflict beginning.

Someone with a £250,000 mortgage being repaid over a 25 year period would face monthly payments of £1,727 were they to fix at 6.75 per cent, compared to £1,445 a month prior to the war.

This means households either buying or remortgaging in this scenario could face shelling out £3,380 more a year on a £250,000 mortgage than they would have back in February.

Households already in a fixed mortgage will be protected until that deal ends, and will only be exposed to these higher rates if they need to remortgage. 

The middle of the road scenario: A £1,950 rise 

The central case put forward by the Bank of England is that energy prices will gradually fall back, with inflation reaching 3.7 per cent (currently 3.3 per cent) but staying higher for longer. 

Markets also view this as the most likely path, implying mortgage rates will stick around their current levels with some small rate hikes. 

According to Moneyfacts, this would see average fixed rates around the 5.5 per cent to 6 per cent mark. 

Someone with a £250,000 mortgage being repaid over 25 years could expect to pay between £1,535 – £1,610 a month. This would still add between £1,050 and £1,950 to the yearly cost of their mortgage, compared to today's average payments. 

The best case scenario: A rise as little as £150 

The Bank of England most benign scenario sees the conflict reaching a peaceful conclusion imminently allowing energy prices to fall quickly. 

In this case, inflation peaks at 3.6 per cent this year and falls below 3 per cent in autumn 2027, allowing mortgage rates to edge down sooner. 

Average mortgage rates would stabilise between 5 and 5.5 per cent, which would mean a £250,000 mortgage would cost between £1,460 and £1,535 for someone fixing with a 25 year repayment term.

This would limit the increase in repayments to roughly £150-£1,050 a year versus pre-conflict levels. 

How to limit the damage 

'The Bank of England’s 'Trumpflation' stress scenarios lay bare just how damaging the economic repercussions of the Iran conflict could become,' says Adam French, head of consumer finance at Moneyfacts.

'At one end, a relatively benign path would see energy prices ease quickly, with inflation peaking at around 3.6 per cent 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 per cent, forcing a much more aggressive response from the central banks rate setters.

'Mortgage rates typically sit around 1.5 to 1.75 percentage points above base rate, which would put average borrowing costs over 6.5 per cent.

'That would translate into an increase of more than £3,000 a year for many borrowers - a devastating hit to affordability.'

The biggest danger facing households is the possibility they may need to remortgage as the worst case scenario unfolds. 

However, French says there are still ways to limit some of the damage. 

'Most lenders allow you to secure a new deal up to six months before your current fixed rate expires, effectively giving you the option to 'lock in' today’s rates as insurance,' he explains.

'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.'