Homeowners should brace for perpetually higher interest rates, a top British economist has warned

Homeowners should expect higher interest rates to persist 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 of the past decade anytime soon.

And he claimed it would be “terrible” if they did, because low interest rates would be a “bad signal of the state of the economy.”

Hundreds of thousands of fixed-rate mortgages with an interest rate of 3 percent or lower are expected to expire in 2025.

But in a blow to homeowners, Johnson said the cheap deals of the 2010s were a thing of the past before Liz Truss’s infamous ‘mini-budget’.

“I don’t think they will (go that low again), and I don’t think they should, and I think it would 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 essentially zero interest rates for so long.”

He said a “good outcome” would be if interest rates stabilized at around three percent, while inflation returned to the Bank of England’s two percent level. “That’s a more normal economy,” Mr Johnson explained.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates will not return to the low levels of 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 where interest rates were this low was that ten-year period in the 2010s and I really think we should see that as an unfortunate event . .’

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

‘It is very striking that we have had this unexpected, large increase in interest rates and that we have not had a crash in the housing market.

‘And that’s partly because we now have more people who own their homes outright than people with mortgages, and I think more house transactions are done for cash than for mortgages – apart from first-time buyers.’

The fixed mortgage interest rate is now generally lower than at the beginning of the year. At the beginning of January 2024, the average five-year fixed rate was 5.55 percent, while the average two-year fixed rate was 5.93 percent.

The Bank of England’s base rate has been cut twice this year to 4.75 percent, but some mortgage rates have risen recently 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 near zero.

Interest rates have been rising from late 2021 in an effort to curb rising inflation, which was fueled by the Covid pandemic and exacerbated by Russia’s invasion of Ukraine.

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

Some mortgage rates have risen recently due to swap rates, which lenders use to price their loans

Chancellor Rachel Reeves has promised to examine every pound spent in Whitehall ‘line by line’

In his interview with the Mail, Mr Johnson also warned that the Chancellor will have very “tough decisions” to make in 2025 as she carries out her departmental spending review and looks ahead to the autumn budget.

Rachel Reeves has pledged to examine every pound Whitehall spends ‘line by line’, and has warned she ‘will not tolerate’ taxpayers’ money being spent on low-value projects.

She also told companies earlier this fall that she would not “come back with more loans or more taxes.”

But Mr Johnson said things at the Spending Review would ‘hit the sack’ because there is ‘no room to manoeuvre’ on borrowing and even if she wanted to raise taxes the next Budget won’t be released until the autumn .

“It will be very difficult,” he said, warning that pressure on the chancellor to increase government spending could force her to raise taxes.

‘The pressure on everything, on expenditure, is high. So unless she can credibly keep spending pressures in check, she may not have to come back for tax hikes.

“But if she is looking for significant spending increases, tax increases are sure to follow.”

He also warned that forecasts of “very slow growth” in household income in the coming years “do not 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’s just going to feel like a continuation of this long period of very slow income growth.”