Mortgage rates are set to rise by 100 basis points over the next three years, while house prices will climb by £40,000 over a four-year period, according to the Office for Budget Responsibility.     

The public finances watchdog said home loan rates will lift as money markets expect fewer interest rate reductions this year, in its Spring Statement forecast yesterday. 

The body says: “Average interest rates on the stock of mortgages are expected to rise from around 3.7% in 2024 to a peak of 4.7% in 2028, then stay around that level until the end of the forecast.” 

The thinktank’s forecast period runs from 2024 to 2029. 

Traders are betting on in two, or perhaps, three rate cuts in 2025. 

Back in October when the OBR published its last forecast alongside Chancellor Rachel Reeves’ Budget, markets had expected four reductions this year. 

A slower reduction of the base rate has added 20 basis points to the OBR’s calculations of mortgage repayments.  

Around 1.8 million mortgages are up for renewal this year, according to UK Finance. 

The OBR added that because around 85% of home loans are on fixed rates, “increases in Bank rate will feed through slowly to the stock of mortgages”.

The watchdog also expects average house prices to rise from around £265,000 in the final quarter of last year, to around £295,000 by 2029. 

It pointed out that house prices rose at an annual rate of 3.9% in the final three months of last year, 90 basis points higher than its October report had forecast. 

The body said: “We expect this momentum to ease over the year as higher interest rates continue to weigh on demand.” 

It points out that house price growth is currently 2.8% in 2025 and will remain at a similar level for the majority of the forecast period, “broadly in line with growth in nominal earnings”.

However, the body said if the government delivers on its plan to build 1.5 million homes over the next five years, this will reduce house prices.

The watchdog expects a 0.5% increase in the UK’s housing stock as a result of the government’s planning  reforms, which will cut average house prices by around 0.8% by 2029.