Capital Economics recently revised its predictions for the base rate suggesting it would go up to 0.25 per cent by next spring, then rise to 0.50 per cent in 2023.
It had originally predicted that rates would not rise from their current record low until 2023 before reaching 0.50 per cent in 2024.
In a report today, Capital Economics said: “Given the elevated spread of mortgage rates over bank rate, this change may not apply much upward pressure to borrowing costs.”
The analysis said the reduction in the base rate from 0.75 per cent to 0.10 per cent was not passed on to mortgage rates which caused lenders’ profit margins to rise.
Although margins are expected to narrow if the base rate goes up, lenders’ confidence in the economic recovery, continued house price rises and improved risk appetite will balance this out.
This sentiment was also reflected in the Bank of England’s recent Credit Conditions survey which suggested lenders intended to ease credit conditions going forward.
However, Capital Economics said mortgage rates would not fall as low as originally expected.
It revised down its prediction that mortgage rates would drop to an average of 1.6 per cent by 2023. Instead, it forecast average rates to fall to 1.7 per cent next year, before rising to 1.8 per cent by 2023.
The firm suggested mortgage affordability would remain manageable as lenders seemed to be “prepared to accommodate households’ increased appetite for housing”. The analysis said this was evidenced by the jump in the size of mortgages being lent.
The analysis said “low interest rates and increased spending on housing costs” would also continue to support house prices. For this reason, Capital Economics said it still expected average house prices to rise by five per cent next year.
