Mortgage costs to take biggest share of incomes since 2009

The Office for Budget Responsibility (OBR) has forecast that the average effective mortgage interest rate will rise from 4% in 2026 to around 5% by 2031, as borrowers refinance onto higher rates. 

Meanwhile, mortgage repayments are expected to reach 4.25% of household disposable income by 2031, the highest level since 2009 and more than double the 2021 level of 2%.

Richard Pinch, senior director at banking and credit advisory consultancy Broadstone, commented: “The prospect of rising mortgage rates, combined with borrowers rolling off cheaper fixed rate deals, presents a growing challenge for households and lenders given sustained affordability pressures.

“As mortgage repayments are expected to account for their highest share of household disposable income since 2009, borrowers will face an increasingly challenging financial environment as they refinance onto more expensive deals.

“While mortgage portfolios have remained relatively resilient, lenders cannot afford to be complacent to the potential for higher credit risk across mortgage portfolios. Robust affordability assessments, proactive monitoring of borrowers showing signs of financial stress and forward-looking portfolio stress testing will be critical to identifying emerging vulnerabilities and managing potential increases in arrears and defaults.”