Mortgage costs set to soar, OBR warns

Laura Suter
28 October 2021

•    Mortgage interest to rise 13.1% in 2023
•    Rise would add £1,260 to average variable rate £450,000 mortgage
•    For £250,000 fixed-rate deal it would add £600 a year

Laura Suter, head of personal finance at AJ Bell, comments: 

“The OBR has issued a stark warning to homeowners: be prepared for soaring mortgage costs in the next few years. Buried deep in the Budget documents are figures showing that the OBR expects mortgage interest costs to start rising next year, before hitting a 13% increase in 2023. 

“The figures show that homeowners need to be braced for a big leap in mortgage costs to 14% in the first quarter of 2023, climbing to 14.8% in the second quarter, before dropping to 10.5% by the end of the year. In comparison, this year saw an average fall in mortgage interest costs of just over 2%.

“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 re-mortgage in the coming years. 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 re-mortgage in the first half of 2023.

“Someone with £250,000 of borrowing who fixed earlier this year and renewed in 2023 would see £600 a year added to their mortgage costs, while someone with £450,000 of borrowing would see their costs hike by £1,068 a year*.

“Someone 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. To put that into context, for a basic-rate taxpayer that’s an additional £2,000 of earnings they’d need to have to pay a £1,260 increase in their mortgage bill after tax.”

How to beat the hike

“Fixing could be a good option for homeowners on a tracker deal who believe the OBR estimates that rates will significantly increase. Anyone in this position should consider getting a move on, as mortgage rates will start to edge up the closer any rate rise becomes. In a consistently increasing rates environment, the longer you fix the longer you can lock in today’s low rates. However, homeowners need to be careful when thinking about any long-term fixes. 

“While, a long-term fix will give you certainty over what you’ll pay and you won’t be caught out by any shock increases, the payoff is that you’ll pay a higher interest rate now than for a shorter-term fix – so you need to be fairly confident that rates will rise during that 10 years. But with mortgage rates so low at the moment, there’s never been a better time to get a longer-term fix.

“Before taking the leap people need to think very carefully about locking in for a long time. It’s not easy to get out of a mortgage and usually comes with a hefty price tag attached, so you need to be pretty certain you’ll be staying put for the next 10 years. Most fixed term mortgages have an early repayment charge, which you have you stump up if you want to end the deal early. Typically this is a percentage of the amount you have outstanding on the loan, and generally it’s a higher fee the longer you fix for, meaning you can be faced with a pretty whopping bill if you want to get out. That said, some have a sliding scale, so the cost to exit is cheaper the longer you have the mortgage.

“First-time buyers are likely to feel any rise in mortgage interest rates the most. Some have borrowed up to their affordability limit to get onto the property ladder, and so will find additional monthly costs harder to swallow. First-time buyers also typically have a higher loan-to-value, or lower deposit, meaning they have more borrowing on the average property and already have higher mortgage rates.”

*Assumes the current average fixed rate of 2.06, based on Bank of England figures, and assumes a 25-year, repayment mortgage. Calculations done via L&C’s mortgage interest calculator  https://www.landc.co.uk/calculators/mortgage-interest-rate-calculator/

OBR forecasts for mortgage interest

Quarter

Year-on-year growth in mortgage interest payments

Year average

2021Q1

-7.2

-2.4

2021Q2

-2.5

2021Q3

-0.3

2021Q4

0.2

2022Q1

0.7

5.6

2022Q2

2.8

2022Q3

7.4

2022Q4

11.4

2023Q1

14.0

13.1

2023Q2

14.8

2023Q3

13.0

2023Q4

10.5

2024Q1

7.9

5.4

2024Q2

5.7

2024Q3

4.4

2024Q4

3.8

2025Q1

3.6

3.9

2025Q2

3.8

2025Q3

4.0

2025Q4

4.3

2026Q1

4.5

4.3

2026Q2

4.4

2026Q3

4.2

2026Q4

4.0

Source: OBR, October 2021 Economic and fiscal outlook – supplementary economy tables: https://obr.uk/efo/economic-and-fiscal-outlook-october-2021/

Laura Suter
Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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