Mortgage rates are likely to go up slightly after today’s budget and could remain elevated until 2029, experts have warned.
The Office for Budget Responsibility published data looking at the financial impact of the Budget. It predicted a relatively small increase to the base rate for the next five years as a result of the fiscal event.
It suggests interest rates will fall to as low as 3 per cent by 2029, but will be higher by 0.25 percentage points that what it might have been had the Budget not happened.
“What we saw today was a fiscal loosening – spending gone up by more than taxes – and this should increase growth, which will cause slightly higher inflation, and because of that, higher interest rates,” says Professor Stephen Millard, deputy director at the National Institute of Social and Economic Research.
High interest rates lead to higher mortgage rates, handing a further blow to homeowners and first time buyers.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The OBR forecasts show that Budget policies will modestly push up inflation, which does make for higher interest rates, and hence mortgage rates.”
Affordability could also remain an issue for prospective buyers after confirmation the first time buyer stamp duty threshold to £425,000 will cease from March 2025, falling to £300,000.
Higher mortgage rates coupled with fewer exemptions is likely to make it more difficult for first time buyers to get on the ladder.
The news comes on the day it was announced that the lowest of the top ten lender rates are now on par or lower than before the infamous mini-Budget undertaken when Liz Truss was prime minister. The bungled budget, on the 23 September 2022, saw the rates at which banks can borrow money to lend to people for mortgages spike sharply.
According to analysis by broker L&C, average rates are now 4.13 per cent for the lowest average two-year fixed rate mortgage – these are not the cheapest mortgages on the market but will represent what people are typically paying.
Back in October 2022, they were 6.16 per cent. That is despite the fact that the Bank of England base was 2.25 per cent before the mini-Budget and currently stands at 5 per cent.
However, for people with smaller deposits, the rates are still higher compared with 2022. Someone with a ten per cent deposit on a two-year fixed rate is on average paying 5.06 per cent compared to 4.57 per cent in September 2022.
After the Budget, the cost of Government debt increased – used to finance longer-term debt including mortgages – as the financial markets digested the OBR report highlighting higher mortgage costs and more borrowing than expected. The 10-year gilt yield was up 0.03 percentage points on the day at 4.35 per cent, a five-month high. The two-year yield rose 0.05 percentage points higher to 4.3 per cent.
However it wasn’t a “huge readjustment like we saw after the mini budget, which happened almost straight away,” said David Hollingworth, spokepserson for L&C.
Vivek Paul, UK chief investment strategist at BlackRock, said pre-Budget briefings had “broadly had the desired effect on markets for now, with the reaction in gilt yields a far cry from the 2022 episode”.
“The mortgage market has seen bouts of huge volatility in the last two years so it’s encouraging for borrowers to see that rates are now in a better place, despite the volatility the Budget will bring,” says Hollingworth added.