The Energy Shock Hits Mortgages: Why Commercial Conversion Still Stacks Up

Rates Held Again. The Bank Is Now Openly Talking About Raising Them.

At its meeting ending on 16 September, the Monetary Policy Committee voted 6-3 to keep Bank Rate at 3.75%. Same split as July, same three dissenters. Huw Pill, Catherine Mann and Megan Greene all voted to go to 4%.

What changed is the language. The Bank now says the risks to inflation are tilted to the upside, and more so than in July. The reason is energy. The conflict in the Middle East has pushed Brent crude to $106 a barrel and UK wholesale gas up 78% since the July forecast. Andrew Bailey put it plainly: the longer this volatility lasts, "the more likely it is we will need to raise Bank rate."

A year ago, everyone was asking how many cuts were coming. Now the Governor himself is preparing the ground for a rise. If you are planning a refinance or a purchase in the next six months, budget for rates going up before they come down.

CPI Is at 3.1%. The Bank Expects It to Pass 4%.

The ONS figures out on 16 September showed CPI inflation rising to 3.1% in August, up from 2.9% in July. Motor fuel made the biggest upward contribution. Goods inflation jumped from 2.2% to 2.7%. Services stayed at 3.4% and core inflation held at 2.6%.

So far this is an energy story, not a wages story. The Bank says it has seen little evidence of what it calls second-round effects, where businesses and workers start building higher inflation into prices and pay. That is the bit that would force a rise. The worry is that the longer energy stays expensive, the more likely those effects become.

The Bank's own forecast has CPI at around 3.75% in the final quarter of 2026 and slightly above 4% in early 2027. That is double the target. The next CPI release lands on 21 October, a fortnight before the November MPC decision.

Lenders Have Repriced Twice in a Month. Buy-to-Let Margins Are Close to Zero.

All of the big six lenders raised their fixed rates twice in recent weeks. Around 25 lenders, including Nationwide, HSBC, Lloyds, Halifax and Santander, put rates up in the week to 11 September alone. On the buy-to-let side, Moneyfacts puts the average two-year fix at 5.32% and the average five-year fix at 5.70%.

Buyers have noticed. Bank of England figures published on 29 September show 54,900 mortgage approvals for house purchase in August. That is down from 55,900 in July, down 16% on a year ago and the lowest since December 2023. Gross secured lending fell from £25.3bn to £23.6bn in a single month. The effective rate people are actually paying on new mortgages rose from 4.45% to 4.60%.

Now run the buy-to-let numbers. Take a £200,000 flat let at a 5% gross yield. That is £10,000 a year in rent. Borrow 75% (£150,000) interest-only on a five-year fix at 5.70%, and the interest alone is £8,550. You have £1,450 left to cover letting fees, repairs, insurance, voids and compliance under the Renters' Rights regime. And that is before tax. For most landlords, that deal does not work.

Landlords who are selling are finding the same problem from the other side. Investors made up just 14.1% of Hamptons' purchases in July, and buy-to-let buyers who do turn up are negotiating hard. The exit is getting more expensive too.

29% of the Target Delivered. 44% of the Time Gone.

The latest MHCLG estimate puts net additional homes in England at 437,900 between 9 July 2024 and 20 September 2026. Against a target of 1.5 million, that is 29% of the job done with 44% of the parliament gone. At the current pace, the government misses by more than 500,000 homes.

There is one bright spot. Housing starts reached 35,910 in the second quarter of 2026, up 20% on a year earlier. But completions fell 3% on the quarter to 35,800, and planning approvals for new homes dropped 21% in the same period according to the Home Builders Federation. HBF research also found nine in ten council planning departments are understaffed, and only one in five major applications is decided within the 13-week statutory period.

Compare that with Class MA. A prior approval application has a 56-day determination period. If the council does not decide in time, the approval can be deemed granted. For a developer, that certainty on timing is worth a lot when every month of holding costs is priced at nearly 6%.

Higher Rates Squeeze Commercial Values Too. That Is the Buying Window.

Rising rates do not only hurt landlords. They hit commercial property values as well. The CBRE UK Monthly Index showed all-property total returns of 2.5% in the first half of 2026, against an income return of 2.8%. In plain terms, capital values slipped and income did all the work. All-property equivalent yields are sitting at around 7% (MSCI), with prime regional offices around 6.75%.

Secondary offices and tired high street units are priced on income, by buyers who are paying more for their debt than they were a year ago. That keeps prices down. A residential conversion is valued on what the finished flats are worth, not on a commercial rent. The wider that gap, the better the deal. A higher-rate world widens it.

There is a catch, and this month showed it. On 15 September, Maidstone Borough Council made a non-immediate Article 4 Direction covering seven major town-centre office buildings, removing their Class MA rights. Representations close on 30 October. Non-immediate directions usually give a 12-month notice period before they take effect, so owners and buyers of those buildings now have a deadline. Other councils are watching.

Two appeal decisions published on 17 September show how inspectors are thinking. In Folkestone, a single flat in a former hair and beauty unit was refused because the commercial ground floors were part of the Leas and Bayle Conservation Area's character. In Birmingham, 15 flats next to a railway and commercial premises were allowed, because the applicant brought proper acoustic, glazing and ventilation evidence. The lesson is simple. Pick the right building, and do the technical work up front.

The conditions everyone is complaining about are the same conditions that create the buying opportunity. Expensive debt keeps commercial prices soft and keeps big money on the sidelines. When rates eventually turn, both of those change. The investors who did the groundwork while it was uncomfortable will be the ones holding consented schemes.