A ceasefire in the Middle East has prompted forecasts of potential mortgage rate reductions, though economists caution that any decline will be gradual rather than immediate.
Capital Economics projects that average mortgage rates for borrowers with 25% deposits could fall from approximately 5% to around 4.3% by January 2027 if the truce holds. This would reduce monthly repayments by roughly £100 on a typical £250,000 loan.
Oil price projections
Ruth Gregory, Deputy UK Chief Economist at Capital Economics, told GB News that in their baseline scenario, Brent crude would average around $95 per barrel in the second quarter before easing towards $80 per barrel by the final quarter.
However, she warned of “significant hurdles to overcome”. If hostilities resume, Brent crude could remain above $100 per barrel, potentially pushing inflation to around 7% and forcing the Bank of England to raise the base rate multiple times, possibly reaching 4.5%.
Market response
Following the ceasefire announcement, money markets have adjusted their base rate expectations, now pricing in just one rise in 2026 rather than the two anticipated earlier in the week. This shift comes as the UK property market continues its uneven recovery from recent volatility.
Tom Bill, Head of UK Residential Research at Knight Frank, said the ceasefire would “steady sentiment” in the housing market but is unlikely to trigger rapid mortgage rate reductions. “What goes up must come down, but for mortgage rates the drop will be notably more gradual than the sharp increase triggered by the Middle East conflict,” he stated.
Bill noted that even if the ceasefire holds, inflation pressures and higher government bond yields, which underpin fixed-rate mortgages, are likely to keep borrowing costs elevated. The cautious outlook reflects broader concerns about ongoing challenges in the UK property market, where sales activity has remained subdued.
Outlook
The mortgage market’s trajectory will depend heavily on the durability of the Middle East ceasefire and its impact on global oil prices. While the immediate market response has been positive, economists emphasise that borrowers should not expect a swift return to the lower rates seen before recent geopolitical tensions.
