This would also be more than double the 2021 level of 2%.
The OBR forecasted outstanding mortgage debt to remain at around 85% of household disposable income throughout its forecast period. This would still be below the financial crisis peak, however above levels seen before the early 2000s, when effective mortgage rates were significantly higher.
Richard Pinch, senior director at banking and credit advisory consultancy Broadstone, said: “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.”
The average effective interest rate on outstanding mortgages is expected to rise from 4% in 2026 to around 5% in 2031, according to the forecast,
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The OBR attributed the anticipated rise to an upward-sloping yield curve pushing up quoted mortgage rates and borrowers coming off deals fixed when rates were lower.
As such, the effective rate would be above the post-financial crisis average of 3%, but significantly below levels seen in the decades leading up to 2008.
House price growth to stay below inflation
The OBR forecasts average house price growth of around 2% in 2026 and 2.5% in 2027.
It said this would continue the recent trend of house price growth remaining below CPI inflation, mostly reflecting higher mortgage rates and stagnating real incomes.
The forecaster expects house price growth to average 2.75% from 2028 onwards as real income growth recovers. Its near-term outlook for house price growth is therefore lower than in its March forecast.
It also expects that the Your First Home scheme could raise house prices marginally by stimulating housing demand.
Property transactions are expected to rise from around 1.2 million in 2026 to around 1.3 million in 2031.
The forecasted transactions over the period are were 4% lower than in its March forecast during the Chancellor’s Spring Statement. The OBR attributed this downgrade to higher mortgage rates weighing on activity and its downward revision to its forecast for housing stock growth.
Nominal GDP growth set to slow
The OBR expects nominal GDP growth to slow from around 4% in 2026-27 to 3.75% in 2027-28. Additionally, it forecasts nominal GDP growth to average around 3.75% a year for the remainder of the forecast period, as real GDP growth rises and inflation remains at around 2%.
The OBR said cumulative nominal GDP growth between 2025-26 and forecasts 2030-31 is 1.25 percentage points higher than in March.
