More mortgage pain for households Spring Statement forecasts spell gloom

MILLIONS of households should brace for more mortgage pain as Spring Statement forecasts spell gloom.

The Office for Budget Responsibility has warned the treasury that inflation is now forecast to peak at 3.8% in July 2025, higher than previous expectations.

This warning comes despite inflation having eased to 2.8% in the 12 months to February, with it unlikely to return to the Bank of England‘s 2% target until the following year.

Such forecasts could prompt the Bank of England's (BoE) Monetary Policy Committee (MPC) to hold off on further interest rate cuts.

Responding to Rachel Reeves‘ remarks on the OBR forecasts during today's Spring Statement, Shadow Chancellor Mel Stride stated: “Inflation, which was down to 2% bang on target on the very day of the last general election under a Conservative government.

“We are now told this year we'll be running at twice the level of the forecast under ourselves in 2024.

“This is going to mean prices bearing down on households and on businesses, right across the country, because of her choices.”

Leaving interest rates unchanged is likely to have a limited immediate impact on those with tracker and variable-rate mortgages, as their interest rates are directly tied to the Bank rate and will remain at current levels.

However, delays to BoE rate cuts represent a significant setback for the 1.8million homeowners whose fixed-rate deals are approaching expiry.

These mortgages were secured when interest rates were as low as 2.4%, leaving borrowers facing substantially higher repayment costs when they come to remortgage.

Since then, the BoE base rate has risen sharply, driving up mortgage rates.

Currently, the average two-year fixed-rate mortgage stands at 5.35%, while the typical five-year fixed rate is 5.19%, according to data from moneyfactscompare.co.uk.

To illustrate the impact, borrowers who locked in their deals five years ago benefited from much lower rates, with the average two-year fix at just 2.43% and the five-year fix at 2.74%.

For example, a homeowner with a £300,000 mortgage who secured a five-year fix in 2020 would have paid an average of £1,382 per month.

In stark contrast, the same £300,000 mortgage on a typical five-year fixed rate today would cost £1,787 per month – an increase of £405 each month, or £4,860 over the course of a year.

Those planning to move house from April onwards have also been dealt a significant blow, as Rachel Reeves confirmed in her Spring Statement that the stamp duty holiday, set to end on 31 March, will not be extended.

Key announcements in the Spring Statement:

• No new tax rises: The Chancellor ruled out further tax hikes and pledged to crack down on tax avoidance, aiming to raise an extra £1bn.
• Growth downgraded for 2025: The OBR halved its GDP growth forecast for next year from 2% to just 1%.
• Growth boost from planning reforms: New housing policies expected to raise GDP by 0.6 per cent over the next decade.
• Housebuilding surge: 1.3 million homes expected over five years, with construction hitting a 40-year high.
• £2.2bn extra for defence: Additional funding confirmed to help meet the 2.5 per cent of GDP defence target.
• £400m Defence Innovation Fund: Backing new tech like drones and AI for the front line.
• Welfare shake-up: Targeted employment support and welfare reform to reduce benefit spending.
• Civil service cuts: New voluntary exit schemes and AI tools to shrink Government.

What's happening to interest rates?

Last week, the BoE's rate-setters voted to maintain the base rate at 4.5%.

They last voted to cut rates from 4.75% to 4.5% in February, the third reduction since 2020 and a boon for squeezed borrowers.

But, the latest decision to maintain interest rates comes amid inflation consistently remaining above the Bank of England‘s 2% target, with today's OBR forecast reinforcing this outlook further.

The BoE adjusts its base rate, which influences the interest rates charged to banks, as a tool to manage inflation.

By maintaining the base rate at its current level, the goal is to curb borrowing and spending.

However, striking the right balance between controlling inflation and supporting economic growth remains a challenge.

TheUK economycontinues to struggle, withthe Officefor National Statistics (ONS) reporting that Gross Domestic Product (GDP)unexpectedly shrank by 0.1%in January 2025, contrary to economists' expectations of growth.

The OBR's forecast released today indicates that the UK economy is now expected to grow by just 1% in 2025, a downward revision from its earlier projection of 2%.

Money markets had previously anticipated that the Bank of England would lower interest rates three times in total, reducing them to 4% by the end of the year.

For the time being, the trajectory of future rate cuts remains uncertain.