First-time buyers are facing the most challenging mortgage market since the 2008 financial crisis, the boss of Britain’s largest housebuilder has warned, as the fallout from the Iran war forces the Bank of England to abandon hopes of interest rate cuts and contemplate raising borrowing costs instead.
The conflict, which began at the end of February, has sent global energy and commodity prices soaring, reigniting inflation fears that had been ebbing. The Bank of England’s Monetary Policy Committee (MPC) voted unanimously in March to hold the Bank Rate at 3.75%, but the language in its statement has shifted markedly. The previous phrase that “Bank Rate is likely to be reduced further” has been removed, replaced with a commitment to “monitor closely the situation” and “stand ready to act as necessary.” One MPC member even voted for an immediate rate hike to 4% in April, signalling a hawkish turn. The Bank has warned that “higher inflation is unavoidable,” and market expectations now point to at least one rate rise later this year, with mortgage costs staying higher for longer.
How the Iran war upended rate expectations
The trigger was the disruption to global energy supplies caused by the conflict. UK CPI inflation, which had been easing, rose to 3.3% in March 2026, up from 3% in February, and some forecasters believe it could breach 5% this year as higher energy prices feed through to households and businesses. The Bank’s MPC is particularly concerned about “second-round effects” – the risk that higher living costs lead to wage and price-setting behaviour that embeds inflation. In response, swap rates, which underpin fixed-rate mortgage pricing, have become extremely volatile and have edged upwards, wiping out any hope of the rate cuts that had been widely predicted for 2026 at the start of the year.
The impact on mortgage borrowers has been immediate. In March, the average interest rate on newly issued mortgages in the UK was 4.03%, down only fractionally from 4.10% in February, but that headline masks the chaos beneath: lenders have been repricing products rapidly, with some cutting rates while others increase them or tighten criteria. In the week ending April 24, West One slashed some residential mortgage rates by up to 0.55 percentage points, while Darlington Building Society and Fleet Mortgages also made cuts – but elsewhere, rates rose. The net effect has been a market where buyers cannot rely on any deal staying available for long.
For first-time buyers, the picture is especially bleak. The average deposit now exceeds a year’s salary in many parts of Britain: £40,893 nationally, against typical earnings of £40,436. In England, the average first-time buyer deposit is £63,855; in Greater London it is £137,025. And while a minimum 5% deposit is possible, most lenders demand 10% or more to secure lower rates.
‘We were heartbroken’ – buyers forced to pull out
Panos, a 36-year-old executive sous chef, and his wife had agreed to buy a three-bedroom house in Hanwell, west London, in early February, with a five-year fixed-rate mortgage offered at 4.18%. When he spoke to his broker on 13 April – after the start of the war – that rate had jumped to 5.22%. Monthly payments would rise from £2,600 to £3,100. “We could not afford this – it would mean all my wages would go into paying for the house, and we would have to rely on my wife’s wage, which is not very high,” Panos said. “We were heartbroken as we had to pull out.” The couple, who want to start a family, are now renting indefinitely. “I can’t believe that something happening on the other side of the world is affecting England, and everyone in the world,” he said.
Edward, 47, a producer from Staffordshire, sold his house last October, expecting to buy a new home within six months. He and his wife and son moved into rented accommodation, betting that interest rates would fall. “Then, when things couldn’t get any worse, the war happened, and mortgage rates just skyrocketed day by day,” he said. Midway through their tenancy, the landlord served a section 21 eviction notice because his own circumstances changed. Under the Renters’ Rights Act 2025, section 21 “no-fault” evictions were abolished in England from 1 May 2026, but landlords could still serve valid notices up to 30 April 2026, provided court proceedings were begun by 31 July. Edward’s family found another rental in mid-April – more expensive and smaller – but the spring uptick in listings had not materialised, and competition for every affordable house was fierce. “We took a gamble and lost,” he said.
Jonathan, a 49-year-old academic and single parent in Leicester, had a two-year fixed rate of 3.6% agreed in January for his two-bedroom terrace. That was revised up to 3.97% in early February, but at the start of April, the bank withdrew the offer entirely, citing changed borrowing criteria. He has now secured a rate of 5.2%, costing him an extra £150 a month, and has pushed the mortgage repayment date to 2049 – when he will be 72. “I’ve pushed the mortgage repayment date to 23 years,” he said.
Grace, a 27-year-old NHS worker in Northamptonshire, had a five-year fixed rate of 4.09% agreed in principle on a £174,000 loan with a £47,000 deposit. When her first purchase fell through, she was advised to keep the deal and find another property. In March she found a three-bedroom house, but during the Easter holiday the bank told her she needed a new mortgage deal because the sale would not complete in time – and then slashed the maximum loan to £134,000, leaving her £50,000 short. Her broker appealed, and the bank eventually reduced the cut to £18,000. She has now secured 5.2% on a £170,000 mortgage, fixed for five years, with a £67,200 deposit. “I know I’m not the only person experiencing this, but it feels a bit unfair,” she said. “My friends who are in their 20s and early 30s tell me they’ve stopped looking for houses because of issues with mortgages. They’ve given up on buying a house until things cool down.”
Broader outlook: higher costs, tighter lending, and a rental market in flux
The Bank of England’s own economic forecasts show the conflict weighing on growth. Construction output fell 2.0% in the three months to January 2026, with private new housing down 6.3%; residential starts in the first quarter of 2026 were down 24% quarter-on-quarter and 32% year-on-year. The MPC is caught between containing inflation and avoiding a deeper slowdown, with the market-implied path for Bank Rate now higher over the next three years than before the war.
For would-be buyers, the fallout extends beyond mortgage rates. Lenders are reassessing affordability criteria more strictly, and credit scores – even “good” ones, as Grace discovered – are not always enough to protect against sudden changes in a bank’s lending policy. A mortgage application itself can cause a temporary drop in score. And while the rental market is showing signs of stabilisation – rent increases slowed to 1.9% year-on-year in March, earnings have been rising faster than rents, and the number of homes available to rent is up 11% on a year ago – the total stock remains 23% below pre-pandemic levels. Competition for rentals, though easing, is still double the pre-pandemic average. Meanwhile, the shift towards professional landlords, driven by higher borrowing costs and the Renters’ Rights Act, could see as many as 220,000 rental households leave the sector by the end of 2026.
Edward, still renting in Staffordshire, has had to revise his expectations sharply. “What houses we could view to buy seemed to be having a rush on from other desperate buyers – even a week’s delay to view meant a house that was affordable quickly became unaffordable,” he said. “No one seems to be listing at the moment.”
