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Warning that mortgage costs could rise 13% by 2023

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Written by: Samantha Partington
29/10/2021
Homeowners are being told to prepare for a 13% increase in their mortgage interest costs by 2023 as rates are forecast to rise to rein back inflation.

Expectations for rising mortgage interest costs predicted by the Office for Budget Responsibility (OBR) were buried in the Budget documents. They show that the OBR expects mortgage interest costs to start rising next year before reaching an average 13% increase in 2023.

The forecast runs alongside the OBR’s projection that inflation will peak at 4.4% in Q2 2022 before falling back towards the government target of 2% throughout 2023.

The OBR’s forecast shows that following a fall in interest costs for most of this year they will begin to gradually rise in the first half of 2022 before speeding up in quarter three, rising 7.4% before hitting 11.4% by the end of the year. An average rise of 5% in mortgage costs is anticipated for the year.

By quarter two of 2023, the OBR predicts mortgage cost rises will peak at 14.8% before beginning to fall to 10% in Q4.

Annual rise could exceed £1,000

Analysis by investment platform AJ Bell shows the impact on borrowers’ mortgage costs.

Based on the current average fixed rate of 2.06%, a borrower with a mortgage of £250,000 who fixed earlier this year and renewed in 2023 would see £600 a year added to their mortgage costs. Meanwhile someone with £450,000 of borrowing would see their costs hike by £1,068 a year.

A homeowner on the current average variable rate deal of 2.4% with a £250,000 mortgage would see their annual costs increase by £696 by 2023 and those with £450,000 of borrowing will see their costs rise by £1,260 a year.

According to AJ Bell, a basic-rate taxpayer would need to an annual gross pay rise of £2,000 to meet the £1,260 increase in their mortgage bill.

Laura Suter, head of personal finance at AJ Bell, said: “The OBR has issued a stark warning to homeowners: be prepared for soaring mortgage costs in the next few years.

“Rising mortgage costs will come on the back of increasing interest rates from the Bank of England. Homeowners need to be aware that it’s a case of if, not when, for an interest rate rise now and the clock is ticking on the record low mortgage rates we’ve all become accustomed to.”

“Homeowners on a fixed-rate deal now could face much higher rates when they come to remortgage in the coming years,” added Suter. “Anyone who signed up to a two-year fixed rate deal earlier this year, nabbing a record low rate, will face a stark rise when they come to remortgage in the first half of 2023.”

The equity release sector is also concerned about how rising mortgage costs will affect older homeowners’ opportunity to switch deals.

Stuart Powell, managing director, Ocean Mortgages, said: “Equity release rates have already started the upward shift. Six months ago the best interest rate available was 2.24%, today there are no rates under 3% AER. Over the last month there has hardly been a day go by where a lender has not increased their interest rates.

“We are having to reserve rates for clients whilst they decide whether to proceed or not, in the hope that the lender will allow clients to keep the lower rate deals that we find for them. People considering equity release should seek advice now rather than wait.”

Base rate rises

Traders are speculating that the Bank of England Base Rate will rise by 0.15% in December, according to a Guardian report. The anticipated increase is in response to food and fuel shortages which are expected to push up inflation further. CPI inflation is currently 3.1% while the government’s target is 2%.

Two further increases in the central rate in early 2022 are expected to push the base rate back up to 0.75%.

In a separate analysis of inflation, the OBR said that since it made its central forecast at the end of September whereby inflation peaks at 4.4%, inflation risks have intensified.

The public body has modelled two scenarios where production costs and labour costs continue to rise driving inflation up to 5.4%, it’s highest point in 30 years. If this were to happen, said the OBR, the central bank rate would need to be set at 3.5% to curb spending and rising costs. The OBR said the inflation and base rate outcomes were based on “deliberately stark scenarios”.

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