Homeowners should prepare for higher borrowing rates to last indefinitely, one of the country’s most influential economists has warned.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates will not soon return to the low levels seen over the past decade.
And he said it would be “terrible” if they did, as low rates would be a “bad sign for the state of the economy.”
Hundreds of thousands of fixed-rate mortgages with an interest rate of 3 percent or less are expected to expire in 2025.
But in a blow to homeowners, Johnson said cheap deals during the 2010s until before Liz Truss’s famous “mini budget” were a thing of the past.
“I don’t think they’ll sink that low again, and I don’t think they should, and I think it would be terrible if they did,” he told the Mail.
“It was both a bad sign for the state of the economy and a bad effect on the economy to have effectively zero interest rates for so long.”
He said a “good outcome” would be for interest rates to be set at around three per cent, with inflation back at the Bank of England’s two per cent target. “That’s a more normal economy,” Mr. Johnson explained.
Bank of England struggles to keep inflation within its 2 percent target
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates will not soon return to the low levels seen over the past decade.
“The Bank of England has been around for 340 years or something, and the only period in its entire history where interest rates were this low was that 10-year period in the 2010s and I really think we should see that.” as an unfortunate problem.’
And he added: ‘I don’t think they will return to that region. I think it would be very bad for the economy if they did.
‘However, it is very surprising that we have had this unexpected large rise in interest rates and that we have not had a crash in the housing market.
“And it’s partly because we now have more people who own their homes outright than we do people with mortgages, and I think there are more home transactions being done in cash than with mortgages, apart from first-time buyers.”
Fixed mortgage rates are typically lower now than they were at the beginning of the year. As of early January 2024, the average five-year fixed rate was 5.55 percent, while the average two-year fixed rate was 5.93 percent.
The Bank of England’s base rate has been cut twice this year, to 4.75 per cent, but some mortgage rates have been rising recently due to swap rates, which lenders use to price their loans.
But they are still nowhere near the lows of the 2010s, when bank rates were close to zero.
Interest rates have risen since late 2021 in a bid to curb rising inflation, caused by the Covid pandemic and worsened by the Russian invasion of Ukraine.
Mortgage rates rose as interest rates rose, but there was a sharp rise in mortgage rates after the mini-budget, and many lenders changed prices or pulled deals.
Some mortgage rates have increased recently due to swap rates, which lenders use to price their loans.
Chancellor Rachel Reeves has vowed to examine every pound of Whitehall spending ‘line by line’
In his interview with the Mail, Johnson also warned that the Chancellor has to make “very difficult decisions” in 2025, as she carries out her review of departmental spending and looks ahead to the autumn budget.
Rachel Reeves has vowed to examine every pound of Whitehall spending “line by line” and warned she “will not tolerate” taxpayers’ money being spent on low-value projects.
He also told businesses earlier this fall that he would not “come back with more loans or more taxes.”
But Mr Johnson said things would “get ugly” in the spending review because there is “no room for manoeuvre” on borrowing and even if he wanted to raise taxes, the next budget will not be presented until the autumn.
“It’s going to be really tough,” he said, warning that pressure on the Chancellor to increase public spending could force her to raise taxes.
‘The pressure on everything, on spending, is high. So unless you can credibly control those spending pressures, then maybe you don’t need to come back to raise taxes.
“But if you seek significant spending increases, tax increases will surely follow.”
He also warned that forecasts of “very slow growth” in household income in the coming years “do not make the electorate happy.”
However, he said next year would not be as bad as the cost of living crisis or a recession.
“But I think it will feel like a continuation of this long period of really slow revenue growth.”
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