The UK’s econmic forecast is bleak – here’s what it means for your mortgage | Personal Finance | Finance

The International Monetary Fund (IMF) has slashed its economic forecasts for the UK, warning that the war involving Iran risks throwing the global economy “off course”. In its latest outlook, the IMF said UK economic growth will be weaker than previously expected, while inflation will be higher. It also warned that in a severe scenario, a global recession could be a “close call”.

The IMF now expects UK gross domestic product (GDP) to grow by 0.8% in 2026 and 1.3% in 2027. As recently as January, it had forecast growth of 1.3% in 2026 and 1.5% in 2027. The UK economy grew by 1.3% last year. Inflation is now expected to average 3.2% this year and 2.4% next year, higher than previously forecast and above the Bank of England’s 2% target for longer than expected.

The IMF said rising energy prices, more expensive fuel and higher food costs are likely to keep inflation elevated.

Petrol prices have already risen 19% since the conflict began, with diesel up by more than a third. Unemployment is also forecast to rise to 5.6% in 2026, up from 4.9% last year.

IMF economic counsellor Pierre-Olivier Gourinchas said the global outlook has “abruptly darkened”, warning that disruption to energy supplies could trigger an unprecedented crisis.

In a severe scenario, the IMF said global growth could fall by 1.3% in 2026, bringing the world close to recession.

For UK homeowners and buyers, the outlook suggests mortgage rates will remain higher for longer than previously expected.

Higher inflation makes it harder for the Bank of England to cut interest rates because its primary goal is to keep inflation at 2%. If inflation remains stubbornly high due to energy and food costs, rate cuts could be delayed, or in a worst-case scenario, rates could rise again.

Mortgage lenders base fixed-rate deals on market expectations for future interest rates, so this shift has already pushed borrowing costs higher. Millions of households are particularly exposed. Around 1.8 million fixed-rate mortgage deals are due to end in 2026, with many borrowers moving from ultra-low rates of around 1.5% to 2.5% onto new deals closer to 4.5% to 6%, significantly increasing monthly repayments.

Lenders may also become more cautious in a weaker economic environment, tightening affordability checks and making borrowing harder for some buyers.

Rachel Springall, finance expert at Moneyfacts, told the Express: “A recession worsens the cost-of-living, as wages typically fail to keep up with price rises, creating ‘stagflation’ (low growth and high inflation). To make matters worse, interest rates are usually hiked to quell inflation, so households are further squeezed when they refinance into a more expensive mortgage deal.

“Millions of borrowers are due to come off a cheap fixed rate over the next year, so it will be essential for them to seek advice to see how hard they will be hit by higher mortgage rates. Brokers are an anchor during times of turbulence as they can help borrowers understand how they can best afford a mortgage or plan the available options months in advance.”

She added: “Concerns surrounding the possibility of inflation getting out of control this year have completely flipped the projected path of interest rates. The start of 2026 appeared promising, especially for borrowers about to remortgage, but it’s all changed.

“The tide could turn once the markets feel more confident about future rate pricing, but borrowers who are due to come off a deal soon will be incredibly frustrated by mortgage rate hikes. If someone took out a typical mortgage now, compared to the start of March, it would cost them around £1,800 a year more in repayments on a two-year fixed deal.

“Worse still, borrowing the same size loan on a typical mortgage now, compared to 2021 on a five-year fixed deal, would cost around £5,000 more in mortgage repayments over one year.”

“Borrowers could try to overpay their mortgage, as paying just £100 more per month can shave almost three years off their loan and save over £25,000 in interest on a typical mortgage charging 5%.”

Beyond mortgages, the IMF’s warning highlights wider pressures that could further strain household finances.

Dr Pouria Livari, Senior Lecturer in Operations and Supply Chain Management at the University of Derby, told the Express that the conflict’s economic impact will be felt directly by consumers.

He said: “For the public, this is not just a geopolitical story; it is a cost-of-living story. People may first notice it at the petrol pump, but the knock-on effects can spread much more widely.

“Higher fuel and transport costs raise the price of moving goods, running factories, packaging products, and distributing food. That can then feed into supermarket prices, flights, online deliveries, and household bills.

“The IMF has also warned that a prolonged rise in energy prices could boost inflation, lower growth, and disrupt fertiliser shipments and transport, which can add further pressure to food prices.

“There is also an important inflation and interest-rate dimension. When energy prices rise sharply, central banks become more cautious about cutting rates because they worry that higher fuel and transport costs will spread through the economy.

“The Bank of England kept Bank Rate at 3.75% on March 19, 2026, but markets are reportedly already rethinking the path of future rate cuts and even considering the risk of further hikes if inflation remains elevated.

“In simple terms, if this crisis deepens, people may feel it not only in petrol prices, but also in food costs, borrowing costs, and mortgage pressure through higher inflation.”