OBR ‘is overestimating’ its mortgage rate predictions

THE Government forecaster’s mortgage rate predictions are “implausibly high” and homeowners will not face as much pain as expected, say analysts.

Pantheon Macroeconomics said it expected the mortgage rate on outstanding loans to peak at 3.7pc at the end of 2024, rather than the 5pc forecast by the Office for Budget Responsibility (OBR), in the Autumn Statement.

The difference would save a homeowner with an outstanding £200,000 loan £216 per month in interest.

The numbers refer to the average mortgage rate across all outstanding loans – rather than just the rate on new mortgage deals. This rises more slowly than the rate for new deals as the majority of existing loans are on fixed-rate deals – meaning higher rates only filter through when homeowners refinance.

The OBR has forecast that the effective rate on existing mortgages will nearly double from 2.2pc in September 2022 to 4.3pc by summer 2023, and peak at 5pc in the second half of 2024.

This is a large jump from its forecast in March this year, when it had expected the average rate to peak at only 3.1pc.

Pantheon said: “The OBR is being a bit too gloomy. On close inspection, it has overestimated the size of the hit from mortgage refinancing next year.”

Pantheon said that the new forecast was based on markets’ Bank Rate expectations in the three working days to Oct 26 – when markets were still reeling from the mini-budget fallout.

Investors have since revised down their expectations for the peak in the Bank Rate from 5pc to 4.5pc. Pantheon has forecast an even lower peak at 4pc – up from 3pc today.

The OBR’S forecast also implies that nearly one in five outstanding mortgages will be refinanced every three months. Bank of England data show that the figure is closer to 7pc – or one in 14 loans, Pantheon said.

Based on the slower rollover of loans and a lower Bank Rate peak at 4pc, the effective rate on outstanding mortgage loans will peak at only 3.3pc by the end of 2023 and 3.7pc by the end of 2024, Pantheon said. A smaller increase in rates will in turn reduce the damage to real household disposable income.

The OBR has forecast a record 4.3pc drop in disposable incomes per person this tax year, which will be the largest since ONS records began in 1956. This will be followed by a 2.8pc drop in the next tax year – the second largest fall and only third time the measure has fallen for two consecutive tax years.

Pantheon by contrast, has forecast a smaller 2pc drop in disposable incomes next year.