Loan rates to fall sooner than expected

Mortgage borrowers will see rates fall sooner than expected under new forecasts from the spending watchdog.

The Office for Budget Responsibility (OBR) forecast that the Bank Rate will fall from 5.25pc to below 4pc this year and reach 3.25pc by 2026.

As a result, the OBR predicts that the average mortgage interest rate will be at 4.2pc in 2027. This is 0.8pc lower than its previous forecast of 5pc, made in November last year. Average rates dropped to a low of 2pc at the end of 2021 after staying at around 3pc in the 2010s.

The OBR is also not forecasting the average rate to drop below 4pc any time before 2029. It comes as some lenders have increased mortgage rates this month after weeks of price cuts in the new year. For current mortgage holders with 20 years remaining, a 0.8pc difference in their interest rate would save them around £43 a month for every £100,000 they owe.

According to the Office for National Statistics, the average house price is now £285,000. Based on a 25-year mortgage with a 10pc deposit, repayments would be £1,382.39 instead of £1,499.47, saving £117.08 a month.

David Hollingworth, of L&C Mortgages, said: “The mortgage market feels a much more positive place and it has changed radically since last summer. Lots of people will still be sitting pretty after locking in low rates, when others have already suffered rises of hundreds of pounds a month.

“Those locked in at 1pc or 2pc have a great opportunity to plan ahead and pay down debt or grow their savings. Recently, more have been locking in with shorter two-year rates, in the hope they will see rates drop back. They can hopefully now look forward to lower, more stable rates.”

The current average fixed mortgage rate for those with a 5pc to 10pc deposit is 5.38pc with a two-year fixed rate and 4.93pc with a five- year fixed rate, according to Rightmove. However, the OBR also cautioned that owing to large movements in the Bank Rate expectations since November, there were significant risks to its forecast.

Holly Tomlinson, of wealth manager Quilter, said: “Forecasting mortgage rates is far from a fine art. As we have seen just in the last few weeks, more lenders are upping their rates after a period of decline despite there being no movement on interest rates from the Bank of England. The reality is, borrowers must simply react to what is in front of them at the time that suits their financial plans. Trying to time the market or put off huge life decisions in a bid to achieve lower mortgage rates down the road can often be a fool’s errand.”