Energy market volatility has driven borrowing costs higher in recent weeks, forcing mortgage lenders to adjust pricing while policymakers weigh the potential economic consequences ahead of the autumn Budget.

According to Tom Bill, head of UK residential research at Knight Frank, the rapid shift in market expectations has made mortgage pricing particularly difficult for lenders.

Bill (pictured) said: “Spare a thought for anyone sitting on a mortgage pricing committee this week.

“The job of setting loan terms must be challenging when the number of rate cuts on the horizon moves around so dramatically in such a short space of time.

“The reason is the roller-coaster ride on energy markets since the end of February as the Middle East conflict has unfolded.”

An expectation of rising inflation has pushed the five-year SONIA swap rate to 3.9% earlier this week, compared with 3.5% before the conflict began. The figure represents the highest level in almost a year.

Swap rates are based on expectations of future interest rates and are widely used by lenders to price fixed-rate mortgages.

With mortgage approvals currently around 10% below the five-year average, lenders have been keen to grow their loan books and have responded quickly to market movements in recent months. However, in a more risk-averse environment, borrowing costs often rise faster than they fall.

TRUMP COMMENTS ADD TO UNCERTAINTY

Bill suggested that global political developments — including comments from US President Donald Trump — could influence expectations about how long the current conflict lasts.

He said: “Everything, including the impact on UK inflation, hinges on the length of the current conflict, but his latest comments on when it would end were ambiguous. Soon, but not this week, was the gist.”

The uncertainty means it remains difficult to draw firm conclusions about the longer-term impact on the UK housing market.

However, the fact that 36% of homes in England are owned outright — compared with 29% that are mortgaged — may help cushion the effect of higher borrowing costs, according to data from the latest English Housing Survey.

Assessing what geopolitical tensions mean for London’s global standing is also complex. The capital’s reputation for stability has historically attracted international buyers during periods of volatility, although such events rarely trigger immediate shifts in property market behaviour.

Bill said: “The city’s long-standing reputation for stability comes into sharper focus during moments of geopolitical volatility.

“However, such events don’t tend to mark sharp inflection points in the property market and the headlines generated in the early days of the conflict are unlikely to have a meaningful impact on people’s longer-term property decisions.”

Any lasting changes in market behaviour will ultimately depend on how long disruption continues.

BUDGET PRESSURES IN FOCUS

The potential economic impact of the conflict is also likely to shape the government’s fiscal decisions later this year.

On Knight Frank’s Housing Unpacked podcast, former Treasury special adviser James Nation discussed how energy price shocks create a dilemma for policymakers.

He said: “It’s like trying to pin the tail on a moving donkey.

“Officials will quite rightly tell the government to stay patient and not intervene yet, but you are acutely aware that the public are anxious and you are under a lot of pressure to show that you’ve got a grip.”

Higher borrowing costs and the prospect of increased defence spending could reduce the government’s fiscal headroom ahead of the autumn Budget.

Nation said: “If we see this current economic situation extended, then undeniably you will have speculation on headroom being diminished.

“They are not going to do anything broad-based but may look at discreet revenue raisers like the corporate bank tax.”

While property taxation could once again come under scrutiny, Nation suggested ministers are unlikely to introduce measures that would weaken the housing market.

He said: “Even a Chancellor to the left of Rachel Reeves won’t want to do anything that holds back the housing market.”

He also indicated that further demand-side support measures cannot be ruled out.

Meanwhile, the geopolitical backdrop may also have political ramifications. Following Labour’s poor result in the Gorton and Denton by-election, Nation said international events could delay — but not remove — speculation about the party’s leadership.

He said: “It doesn’t change the fundamentals, but it might delay things.

“The Ukraine invasion in 2022 bought Boris Johnson time and Labour MPs will largely rally around but I don’t think they will start to believe that Keir is the right leader to win them a second term and for that reason he remains vulnerable.”