Capital Economics warns that surging energy prices and stickier inflation are pushing up rate expectations, adding more than £1,100 a year to average mortgage bills by December 2026.
N/A (LSE: N/A) There is no single listed company at the centre of this story, but the numbers will matter to every UK housebuilder, lender and estate agent on the market: Capital Economics now expects the average rate on a new mortgage to hit 4.8% by the end of 2026, roughly 0.8 percentage points higher than it previously forecast, adding around £1,134 a year to the bill for a typical buyer with a 20% deposit.
The upgrade follows the Bank of England's warning that interest rates may need to rise further if the conflict in the Middle East keeps pushing energy prices and inflation higher, with crude back above $100 a barrel and UK inflation running at 3.1% in August 2026. Money markets are now pricing an 88% chance of a Bank Rate rise at the November 2026 meeting and have four increases pencilled in by July 2027, which would lift Bank Rate from 3.75% to 4.75%.
Capital Economics itself is less hawkish than the market, forecasting only two increases to 4.25%, but it has still lifted its assumptions for government bond yields, which feed directly into fixed-rate mortgage pricing. On its numbers, monthly payments for a typical buyer would rise to about £1,268, with the extra cost totalling roughly £5,670 over five years compared with its earlier projections.
The squeeze is expected to persist well into 2027: the consultancy sees average mortgage rates still elevated at around 4.5% by September 2027, some 0.7 percentage points above its previous estimate, adding a further £996 a year to typical repayments. Around 1.5 million borrowers taking out new mortgages between now and the end of 2028 are likely to be affected.
Capital Economics said the prolonged affordability squeeze is likely to cool the housing market further and indicated it may trim its earlier house-price growth forecasts of 3.5% for the year to Q4 2027 and 3.0% for the year to Q4 2028. Investors in UK-listed housebuilders, mortgage lenders and estate agency groups will be watching closely for any downgrade to those projections in the weeks ahead.
This report is based on N/A’s announcement and coverage by Share Talk. Company announcements can be tracked via London Stock Exchange RNS and Investegate, and the full results calendar is worth watching for the next update.
This article is for general information only and does not constitute investment advice or a recommendation to buy or sell any security. Photo: Viktor Forgacs on Unsplash.
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