Homeowners ought to brace for greater borrowing charges to final indefinitely, prime UK economist warns

Homeowners should be braced 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 return to the low levels seen over the past decade anytime soon.

And he claimed it would be ‘terrible’ if they did – as low rates would be a ‘bad signal of the state of the economy’.

Hundreds of thousands of fixed-rate mortgages with an interest rate of 3per cent or below are expected to expire in 2025.

But in a blow to homeowners, Mr Johnson said the cheap deals during the 2010s until before Liz Truss‘s notorious ‘mini budget‘ were a thing of the past.

‘I don’t think they will [go that low again], and I don’t think they should, and I think it’d be terrible if they did,’ he told the Mail.

‘It was both a bad signal of 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 that interest rates settle around three per cent, with inflation back at the Bank of England‘s two per cent target. ‘That is a more normal economy,’ Mr Johnson explained.

The Bank of England is fighting to keep inflation within its own 2 per cent target

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates will not return to the low levels seen over the past decade anytime soon

‘The Bank of England has been around for 340 years or something, and the only period in its entire history when interest rates were that low was in that 10 year period in the 2010s and I really do think we should see that as an unfortunate blip.’

He added: ‘I don’t think they will go back to that region. I think it would be very bad for the economy if they do.

‘It’s very striking though, that we’ve got this unexpected, big increase in interest rates and we haven’t had a crash in the housing market.

‘And it’s partly because we’ve now got more people who own their homes outright than we do people with mortgages, and I think more housing transactions are done for cash than they are for mortgages – outside of first time buyers.’

Fixed mortgage rates are typically lower now than they were at the start of the year. At the start of January 2024, the average five-year fixed rate was 5.55per cent, while the average two-year fixed-rate deal was 5.93per cent.

The Bank of England base rate has been cut twice this year, down to 4.75per cent, but some mortgage rates have recently been creeping up 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 at near zero.

Interest rates increased from the end of 2021 in a bid to slow soaring inflation, which was sparked by the Covid pandemic and worsened by Russia’s invasion of Ukraine.

Mortgage rates climbed as interest rates rose, but there was a sharp increase in mortgage rates after the mini-Budget, with many lenders repricing or withdrawing deals.

Some mortgage rates have recently been creeping up due to swap rates, which lenders use to price their loans

Chancellor Rachel Reeves has promised to examine every pound of Whitehall spending ‘line-by-line’

In his interview with the Mail, Mr Johnson also warned that the Chancellor has very ‘tough decisions’ to take in 2025, as she conducts her departmental Spending Review and looks ahead to the autumn Budget.

Rachel Reeves has promised to examine every pound of Whitehall spending ‘line-by-line’, and has warned she will ‘not tolerate’ taxpayers’ cash being spent on poor value projects.

She also told businesses earlier in the autumn that she would not be ‘coming back with more borrowing or more taxes’.

But Mr Johnson said things would ‘hit the fan’ at the Spending Review, because there is ‘no scope for manoeuvre’ on borrowing and even if she wanted to increase taxes, the next Budget is not due until the autumn.

‘It’s going to be really tough’, he said, as he warned that pressure on the Chancellor to increase public spending could force her to hike taxes.

‘The pressure on everything, on spending, is high. So unless she can credibly keep the lid on those spending pressures, then maybe she doesn’t need to come back for tax increases.

‘But if she is looking for significant spending rises, then tax rises will surely follow.’

He also warned that the forecasts of ‘very sluggish growth’ for household income over the next few years ‘doesn’t make for a happy electorate’.

However, he said the coming year would not be as bad as the cost of living crisis or a recession.

‘But I think it just is going to feel like a continuation of this long period of really slow income growth.’