Households and small businesses across the United Kingdom are coming under renewed financial pressure as the economic fallout from the Iran conflict feeds into higher borrowing costs and rising loan defaults, according to new data from the Bank of England.
The Bank’s latest Credit Conditions Survey shows defaults on secured lending, mainly residential mortgages, rose to 6.2 percent in the first quarter of 2026. This marks the highest level since late 2024, when defaults peaked at 7.8 percent following a series of interest rate increases.
Unsecured borrowing has also deteriorated. Defaults on credit cards, personal loans and overdrafts climbed for a fourth consecutive quarter to 18.6 percent, the highest reading since 2023. The figures suggest that household finances, which had shown signs of stabilising last year, are once again under strain.
Lenders reported that demand for mortgages and credit had been relatively strong before the conflict escalated in the Middle East, supported by a gradual easing in borrowing costs. That trend has now reversed. Since tensions intensified, banks have sharply increased mortgage pricing, with average two-year fixed rates rising from about 4.8 percent to more than 5.5 percent within weeks.
For a typical borrower with a £200,000 mortgage, the increase translates into roughly £1,000 in additional annual repayments, adding pressure to households already dealing with persistent food and energy costs.
Raj Abrol, chief executive of risk analytics firm Galytix, said the impact of the conflict is now visible across the financial system. He noted that rising geopolitical uncertainty has unsettled major lenders and contributed to rapid repricing in mortgage markets.
Abrol warned that defaults are likely to continue rising in the months ahead as inflation remains elevated and living costs stay high. He added that tighter lending standards from banks would make access to credit more difficult for both consumers and small businesses.
He also pointed to wider stress in financial markets, including a sharp rise in short-term corporate borrowing costs for lower-rated firms and widening credit spreads for investment-grade companies. UK government bond yields briefly reached levels not seen since 2008, reflecting increased market caution.
These shifts in wholesale funding conditions are beginning to filter through the wider economy, affecting business refinancing, consumer lending rates and mortgage affordability.
With nearly one million fixed-rate mortgage deals due to expire by September and inflation still around 3.5 percent, analysts warn that financial strain could intensify further if market conditions do not stabilise.
Kenny MacAulay, chief executive of accounting software platform Acting Office, said rising costs and weak growth are placing growing pressure on both households and businesses. He urged small firms to strengthen cash reserves to withstand further volatility.
Small and medium-sized enterprises already facing weaker demand and rising wage bills are expected to remain vulnerable as higher borrowing costs and tighter credit conditions persist. Analysts say the latest Bank of England survey highlights how geopolitical shocks are increasingly feeding into everyday financial pressures across the UK economy.