Average mortgage cost forecast to fall in 2023

The latest research by specialist property lending experts, Octane Capital, has revealed that the average homebuyer can expect to pay £166 more per month as a result of the latest base rate increase by the Bank of England, although this monthly repayment is expected to fall by £188 come this time next year.

Octane Capital analysed the cost of homeownership based on a variable rate mortgage at a 75% loan to value over a 25 year term.

The research shows that a decade ago, after adjusting for inflation, the cost of a variable rate mortgage averaged £895 per month, with the average rate of just 4.29% seeing homebuyers pay £103,993 in interest on their purchase.

Since then, homebuyers have enjoyed one of the longest periods of affordability where the cost of borrowing is concerned, with the Bank of England base rate remaining at or below 1% until June of this year.

However, with the base rate climbing to 2.25% until recently, homebuyers looking to purchase with a variable rate mortgage had already seen the average mortgage fee available to them increase to 5.10%, pushing the monthly cost of their mortgage repayment to £1,310 per month – a £415 increase versus a decade ago, adding over £67,000 in interest.

But with the base rate now increasing to 3%, the single largest increase in over 30 years, Octane Capital estimates that the average mortgage rate will now increase even further to 6.34%. As a result, homebuyers opting for a variable rate mortgage can expect to pay £166 more per month than they were prior to this increase and £581 more than a decade ago, clocking up £220,980 in interest payable.

The good news is that the cost of borrowing is expected to settle, with Octane Capital forecasting that we should see the average mortgage rate fall to 4.93% by this time next year.

This would mean that the average monthly repayment for those buying via a variable rate mortgage would reduce to £1,288 per month based on current property values, a saving of £188 versus current market conditions. Although this reduction could be greater should house prices fall during this time.

CEO of Octane Capital, Jonathan Samuels, commented:

“Opting for a variable rate mortgage will always be a gamble as it leaves you susceptible to an immediate change in the cost of your mortgage repayments depending on the base rate set by the Bank of England.

For many homebuyers, this gamble has largely paid off in recent years, with interest rates remaining at extreme lows for a prolonged period. However, so far in 2022 the cost of a variable rate mortgage has continued to climb in line with interest rates and last week we saw the largest single jump in over 30 years.

This will add a considerable amount to the monthly repayment of those opting for, or already on a variable rate and given the backdrop of the current cost of living crisis, it really couldn’t have come at a worse time.

The good news is that we do expect the economy to settle to some extent in 2023 and while we don’t believe we will see a return to the record levels of affordability enjoyed previously, the monthly cost of repaying a mortgage should drop below the levels currently being seen across the market.”