Home buyers are being braced for a fresh financial hit as mortgage rates surge and inflation uncertainty threatens to keep borrowing costs higher for longer.

Average interest rates on new home loans have jumped sharply in just weeks, piling pressure on households already grappling with rising bills. The average mortgage rate on new deals has climbed from 4.91% to 5.50%, while the typical two-year fixed deal has risen from 4.85% to 5.56%. New five-year fixes have also surged, up from 4.97% to 5.54%.

For first time buyers and those remortgaging taking out a new loan, the impact is immediate and painful. A modest 0.25% interest rate rise could add almost £430 a year to repayments on a typical £250,000 mortgage over 25 years.

Those who are currently on tracker deals are especially exposed, with rates expected to jump quickly. The average two-year tracker, currently at 4.55%, could rise to around 4.80% after just one increase.

Meanwhile, homeowners coming off ultra-cheap fixed deals face an even bigger shock. Locking into a new five-year fix could push monthly repayments up by more than £380 on the same £250,000 loan. The turmoil has already triggered a wave of withdrawals from lenders, with more than 1,700 mortgage products pulled since March 9.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, said: “The outlook for interest rates has changed drastically over the past few weeks, spurred by unstable swap rates caused by the conflict in the Middle East. As a result, the mortgage market has been extremely volatile and over 1,700 products have been withdrawn since March 9.

“While some of these deals have come back, they are at higher rates and it could be fair to assume many lenders may be taking this path, which could drive average rates up further. Currently, lenders are expecting several base rate hikes, which may be demoralising for borrowers.”

She said: “Even just one 0.25% hike could push mortgage rates higher, but borrowers on trackers will quickly feel the force of these rises. Currently the average two-year tracker is 4.55% and a small jump could take this to around 4.80%, adding almost £430 a year onto their loan.”

Around 1.8 million borrowers are expected to refinance this year, many of them rolling off historically low fixed rates agreed during the pandemic. Ms Eastell said: “Around 1.8 million borrowers are expected to refinance this year; this includes those coming off low five-year fixed rates.

“Homeowners should prepare themselves for higher-than-expected costs, if they lock into another five-year term, they could see their monthly repayments spike by over £380.

“Borrowers have the option of securing a new deal typically up to six months before their current rate expires, this may be crucial for those who are concerned about rising costs. This also avoids borrowers slipping onto their revert rate, which would add over £630 per month on average, an amount that many may not be able to afford.”

Savers get a boost – but there’s a catch

While borrowers are under pressure, savers are seeing some benefit as rates edge above inflation – at least for now. The Consumer Price Index (CPI) remained at 3.0% in February, while the average savings rate stands at 3.39%, meaning some accounts are offering a real return.

There are currently 1,679 savings deals beating inflation, up from 1,575 a year ago and 1,365 in 2024. Top easy-access accounts now pay as much as 4.71%.

But experts warn this advantage could quickly evaporate if inflation rises again. Ms Eastell said: “At the beginning of the year, inflation was expected to cool to its 2% target from April. However, ongoing conflict in the Middle East threatens to bring that progress to a screeching halt, potentially keeping prices higher for longer.

“It’s a double-edged sword; stubborn inflation could slam the brakes on rate cuts, or even prompt hikes, which could deliver short-term boosts to savings returns. This relief is short-lived, if inflation stays elevated, it will quickly erode ‘real’ returns and chip away at the true value of savers’ cash.

“For example, savers with £10,000 earning the Moneyfacts Average Savings Rate of 3.37% would earn £339 in interest over a year, but if inflation rose to around 4%, the real value of their original investment would effectively fall by around £61. Settling for average won’t cut it, savers should be hunting down the most competitive rates. The top easy access account currently pays 4.71%, which puts savers ahead, pocketing a real return of roughly £71 even after inflation takes a cut.”

With the end of the tax year looming, savers are also being urged to act fast or risk missing out on valuable tax-free allowances. Ms Eastell said: “With the tax-year end fast approaching, savers should now be taking a ‘use it or lose it’ approach for any remaining cash ISA allowances because any unused portion can’t be carried forward beyond the deadline.

“Savers may also be feeling the pressure to choose an ISA for the 2026/27 year, but providers will be continuing to compete for investors’ new cash for weeks after the deadline, meaning its worth tracking the top returns beyond April.

“The upcoming tax-year also marks the final year for those under 65 to use their full £20,000 cash ISA allowance, which could be crucial for competition. Additionally, from April 2027, ISA transfer rules are tightening, with the key change being that savers will no longer be able to transfer money from a stocks and shares ISA into a cash ISA, which reduces flexibility.”