Iran War Fallout Spreads: Mortgage Rates Soar in Europe and the U.S.

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The economic shock of the Middle East war is infiltrating the global real estate market. Mortgage rates in Europe and North America have surged markedly within just a few weeks, placing increased pressure on homebuyers and refinancing borrowers, and posing cooling risks to housing market activity.

This round of rate hikes is not being driven by central bank increases, but stems from Middle East conflict raising oil prices, which in turn elevates government borrowing costs, prompting mortgage lenders to preemptively bet that official rates will eventually rise to curb inflation. In the United States, the 30-year mortgage rate has climbed to 6.36%, surpassing levels seen before the Federal Reserve began its rate-cutting cycle in September 2025; the average quoted rate for a two-year fixed mortgage in the United Kingdom jumped from 3.97% at the end of February to 5.1% in April, the sharpest rise; in Germany, the 10-year mortgage rate also rose about 0.3 percentage points to around 3.6%.

Investors and economists warn that if the blockade of the Strait of Hormuz persists, mortgage rates will further climb, eventually forcing central banks to raise rates and putting even greater pressure on potential homebuyers. Oxford University economist John Muellbauer stated that an escalation of the conflict "will push us into a severe stagflation."

Central banks remain inactive, market leads in pricing

The starting logic of this round of mortgage rate hikes is not a policy shift by central banks, but the market’s forward-looking pricing.

The Middle East conflict erupted at the end of February this year, subsequently leading to a blockade of the Strait of Hormuz which caused oil prices to spike. The Strait previously carried about one-fifth of the world's oil transport. Rising oil prices intensified inflation expectations and pushed up government bond yields, and mortgage rates are typically closely linked to government borrowing costs.

Mortgage lenders incorporated this expectation into pricing ahead of any central bank action. Analysts believe that if inflationary pressures persist, the Federal Reserve, European Central Bank, and Bank of England will be forced to resume rate hikes, at which point mortgage rates will face a new round of upward pressure.

United States: Combined pressure from supply and demand

In the U.S., this round of rate hikes comes against the backdrop of an already fragile housing market.

The 30-year mortgage rate has risen to 6.36%, surpassing pre-rate cut levels before the Fed's three-cut, 75 basis point easing cycle started last September. The previous easing effects have almost been completely offset.

Evercore ISI economist Matt Aks pointed out that before the financial crisis, the U.S. housing market had overbuilt, followed by a decade of construction undersupply, resulting in a long-standing supply gap, which is now compounded by high interest rates, making market pressures evident.

The Trump administration once tried to push down mortgage rates by having government-backed Fannie Mae and Freddie Mac purchase their own mortgage-backed securities, but the impact of this maneuver has now been offset by the war's shock. "Its effect was quickly drowned out by other factors," said Aks.

Bradley Saunders, North American economist at Capital Economics, believes that with mortgage rates continually above 6%, the U.S. housing market will find it difficult to gather any upward momentum. Brian Lewis, an agent at U.S. property broker Compass, said that many potential buyers are coming to grips with a reality—that mortgage rates will not return to 2% as seen during the pandemic in their lifetimes.

United Kingdom sees steepest rise, buyer purchasing power hit

The UK is the market most visibly impacted by this round of mortgage rate increases.

Data shows that the average quoted rate for two-year fixed mortgages with a 75% loan-to-value ratio has climbed from 3.97% at the end of February to 5.1% in April, rising over 110 basis points in just a few weeks. Knight Frank Finance partner Hina Bhudia described this as "a real blow" to homebuyers’ purchasing power.

She warned that as the effects of mortgage rate hikes gradually transmit, property market activity will inevitably slow down, and house prices will come under pressure. "The eventual impact will largely depend on how long the conflict lasts."

Germany: Rate hikes drive up holding costs

In Germany, the largest economy in the eurozone, the 10-year mortgage rate has risen about 0.3 percentage points to roughly 3.6%.

According to retail mortgage broker Dr Klein, this means that a new loan of 350,000 euros will see annual interest payments rise by about 1,000 euros to approximately 13,000 euros.

Dr Klein executive Florian Pfaffinger said that interest rates "rose sharply in just a few weeks," and market sentiment is clearly "turbulent." He also noted that some buyers are hastening to sign mortgages before rates climb further.

Stagflation risk rises, housing market comes under pressure

The market’s concerns about the future focus on two levels: whether the situation in the Strait of Hormuz can ease, and whether central banks will ultimately be forced to raise rates.

Investors and economists generally believe that if the blockade continues, oil prices will remain high, inflationary pressure will force central banks to tighten monetary policy, and mortgage rates will then face a new round of increases.

Oxford University economist John Muellbauer warned that the risk of "miscalculations" between Trump and Iranian leaders is rising, and if the conflict escalates, "it will push us into severe stagflation."

Knight Frank’s Bhudia concluded that persistently high rates will eventually lead to fewer homebuyers, slowing transaction activity, and house prices coming under pressure will be the inevitable result. The core variable in the current market has shifted from central bank policy to geopolitical developments.

Risk warning and disclaimerThe market contains risks, investors must be prudent. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investments made based on this are solely at your own responsibility. ```