The escalating conflict in the Middle East has triggered financial market volatility that could directly impact UK property investors and mortgage holders, according to analysis from multiple financial institutions.
The Bank of England had cut interest rates four times in 2025, bringing the base rate to 3.75%. However, the probability of another rate cut this month has dropped from 80% to less than 30% following the recent escalation in tensions, with traders now expecting just one cut by the end of the year instead of two.
Mortgage market impact
Fixed-rate mortgage pricing has responded immediately to the crisis. Two-year swap rates increased 26 basis points from 3.33% on Friday to 3.59% on Wednesday morning, whilst five-year swaps rose 21 basis points to 3.71%, according to data from Moneyfacts.
Adam French, Moneyfacts head of consumer finance, said the impact on the mortgage market had been “almost instantaneous. Some lenders have already paused or reconsidered planned rate reductions.”
The National Institute of Economic and Social Research modelled a scenario where oil and gas prices increase by 30% and 50% respectively over one year. This would push inflation higher in 2026 and into 2027, potentially driving the base rate to 4.5%.
Energy costs forecast to rise
Energy regulator Ofgem announced last week that its price cap would fall 7% from April to £1,641 for a typical annual dual-fuel household. However, analysts at Cornwall Insight have now increased their forecast for the July to September price cap to £1,801, up £160 from the April level. The current cap stands at £1,758.
Craig Lowrey, principal consultant at Cornwall Insight, said: “While the rise is eye-catching, any immediate concern should be tempered. We are still early in the assessment period for the July cap, and what happens in the energy markets over the next three months will be the key factor.”
The Resolution Foundation said sustained price rises “could add over £500 to the typical household energy bill in the summer and roughly a percentage point to inflation”.
Property investment implications
The UK’s FTSE 100 share index has lost approximately 3% of its value this week, falling sharply on Monday and Tuesday before recovering slightly on Wednesday. This affects property investors both directly through share holdings and indirectly through pension schemes invested in property funds and real estate investment trusts.
Jemma Slingo at Fidelity International said staying invested throughout volatility periods represents the best strategy. Susannah Streeter at Wealth Club noted that “assets such as gold and more defensive stocks including utilities, healthcare firms, companies selling consumer staples and those with reliable, high-yielding dividends tend to be more resilient in eras of unpredictability.”
For pension schemes, workplace and personal pension plans invest in stock markets alongside property and bonds. In defined contribution schemes, pension values depend on investment performance, with younger savers typically allocated to riskier assets and those approaching retirement moved into cash and bonds.
Market outlook
Analysts noted that whilst the surge in gas prices has been significant, the market impact remains smaller than the shock caused by Russia’s 2022 invasion of Ukraine. However, the combined effect of higher energy costs, increased inflation expectations, and elevated interest rates presents challenges for property market participants across the UK.
The situation continues to develop, with financial markets monitoring geopolitical developments and their potential impact on energy supplies and broader economic conditions.
