The Bank of England has increased interest rates from 3.75% to 4%, marking the first rise in three years as policymakers seek to control inflation driven by rising fuel and energy costs linked to the Iran conflict.
The Monetary Policy Committee voted unanimously to raise the Bank Rate after inflation climbed from 3.1% in August to 3.5% in September, remaining well above the central bank’s 2% target.
Interest rates last rose in August 2023, when the MPC increased borrowing costs by 0.25 percentage points to 5.25%. Rates subsequently declined during 2024 and 2025 as inflation appeared under control, holding at 3.75% since December 2025.
Market impact and mortgage costs
Kevin Shaw, National Sales Managing Director at Leaders Romans Group, said the rise had been largely priced in by lenders. “The direct effect on mortgage rates should be limited, even if some edge their rates up slightly. The bigger impact is on sentiment, because a rate rise makes the headlines,” he stated.
Shaw suggested one further rise to 4.25% may occur in early 2027, but expressed doubt about higher increases. He noted that affordability has gradually improved as prices have corrected over the past two to three years whilst average wages have risen.
Amy Reynolds, head of sales at Richmond estate agency Antony Roberts, reported that fixed-rate mortgages have been approaching 6% for weeks, with mortgage approvals dropping to their lowest level in almost three years. “The real damage is psychological. Another rate rise tells people that borrowing is getting more expensive, not cheaper, and that makes them hesitate,” Reynolds said.
The rate rise follows recent challenges in the lettings sector, adding further pressure to an already subdued property market.
Transaction volumes and pricing
Richard Donnell, Executive Director at Zoopla, confirmed that higher mortgage rates have suppressed housing market activity since spring, with sales agreed down 8% compared to last year. “Current mortgage rates already reflect financial market expectations of four further base rate increases, meaning average mortgage rates are unlikely to rise significantly in the short term unless those expectations change,” Donnell said.
Jeremy Leaf, a north London estate agent and former RICS residential chairman, warned that the impact on an already flat housing market would not be positive. He noted that recent price competition among larger lenders had prompted some mortgage rate reductions, though loans remain more expensive than at the start of 2026.
Iain McKenzie, Chief Executive of The Guild of Property Professionals, emphasised that higher borrowing costs influence buyer affordability and place limits on achievable prices. “What we’re likely to see is an even greater emphasis on value. With buyers enjoying more choice, sellers who price ambitiously could find themselves waiting considerably longer to secure a sale,” he stated.
Industry outlook
Nathan Emerson, Chief Executive at Propertymark, said the decision reflected the Bank’s need to balance inflation control against the wider impact of borrowing costs on households. He referenced last week’s Autumn Budget, which acknowledged consumer concerns including rising energy costs and challenges facing first-time buyers.
Nicky Stevenson, Managing Director of Fine & Country, advised buyers to be financially prepared rather than postpone plans indefinitely. “An increase in Bank Rate doesn’t automatically translate into an equivalent rise in fixed mortgage rates, but it can influence borrowing costs and buyer sentiment,” Stevenson noted.
Jason Tebb, President of OnTheMarket, described the move as almost inevitable given inflation’s rise to 3.5% in the 12 months to September. He warned that further rate increases may follow if inflation continues to rise, further impacting affordability for those planning to move in the new year.
The rate increase comes as the property sector faces multiple headwinds, with rental reforms continuing to impact lettings businesses and transaction volumes remaining below historical averages.
Industry professionals emphasised that realistic pricing will be essential for sellers in the current environment, with serious buyers becoming increasingly selective about purchases. The Your First Home scheme, aimed at new-build properties, is expected to provide some support to first-time buyer activity in 2027.
