Demand for residential mortgages in the UK reached its lowest point in 32 months during August, as prospective buyers faced significant affordability hurdles linked to geopolitical instability. According to Bank of England figures released Tuesday, just 54,918 new mortgage approvals were recorded for the month—the lowest figure since December 2023. This downturn reflects a 15% year-on-year decline in lending to homebuyers, a trend attributed largely to the economic ripples of the conflict in Iran, which have disrupted global energy prices and curbed prospects for interest rate reductions.
The impact of these pressures is reflected in the “effective” interest rate on newly issued mortgages, which climbed to 4.60% in August from 4.45% the previous month. Financial data firm Moneyfacts noted that the average five-year fixed mortgage rate reached 5.94% on Tuesday, marking its highest level since October 2023. Meanwhile, two-year fixed options have climbed to 5.93%, representing their most expensive point since July 2024. The data, which is seasonally adjusted, shows the impact of the rise in UK mortgage rates since outbreak of the war in Iran in late February began pushing up the price of oil, and sinking hopes of interest rate cuts.
Industry experts suggest that these rising costs are fundamentally shifting the housing market landscape. Simon Gammon of Knight Frank Finance noted that buying activity remained sluggish throughout the summer, while Katie Clinton, head of financial services advisory at KPMG UK, stated that persistent inflation and high rates continue to weigh heavily on demand. Furthermore, remortgaging activity also cooled, with approvals dipping to approximately 34,000 in August compared to 34,600 in July, suggesting that some homeowners are delaying refinancing despite reaching the conclusion of their fixed-rate terms.
Looking ahead, economists maintain a cautious outlook. Paul Dales, chief UK economist at Capital Economics, warned that mortgage rates likely remaining above 4.5% throughout 2027 will exert a more significant drag on market activity than the government’s recently unveiled “Your First Home” support scheme. The combination of sustained high borrowing costs and ongoing economic uncertainty continues to present a substantial barrier to market recovery for both new buyers and existing homeowners.
