OBR Forecasts Mortgage Rates Will Rise to 4.5% Even as Base Rate Falls — What Investors Must Know

Most investors celebrated the Bank of England's four base rate cuts in 2025, expecting mortgage costs to follow. The Office for Budget Responsibility's March 2026 forecasts contain a warning that cuts through that optimism: the average effective interest rate on the outstanding stock of UK mortgages is set to rise from 4.1% to 4.5% over the coming years, even as the base rate continues to edge lower. For property investors managing debt-heavy portfolios, this divergence is arguably the most important number buried in the Spring Statement data.

What the OBR Forecasts Actually Say

Chancellor Rachel Reeves delivered the 2026 Spring Statement on 3 March without major policy announcements, allowing the OBR's independent economic forecasts to take centre stage. On headline measures, the picture was relatively benign: inflation is projected to fall to 2.3% in 2026, GDP growth is forecast at 1.1% this year before recovering to 1.6% by 2027, and house price growth is expected to average just over 2.5% annually through to 2030/31 — broadly in line with income growth.

But buried within the same document was a less discussed figure. The average effective interest rate across the entire outstanding stock of UK mortgages — which includes both fixed and variable rate products, new lending and existing long-term deals — is forecast to rise from its current level of 4.1% to 4.5%. This is not the rate being offered on new deals. It is a blended measure of what borrowers across the whole market will collectively be paying as cheap pandemic-era fixes expire and are replaced by products priced at current market rates.

Why the Gap Between Base Rate and Effective Mortgage Rate Matters

The base rate and the average mortgage rate have historically moved in the same direction, but not always in the same proportion or at the same time. Right now, they are diverging. The Bank of England held base rate at 3.75% in February 2026 following the Middle East conflict's impact on oil prices and inflation expectations. Markets have already pushed back expectations of near-term cuts, with the five-year fixed rate average rising to around 5.09% in early March from 4.96% just weeks earlier.

The OBR's projection reflects a structural reality: millions of borrowers who fixed at ultra-low rates of 1.5% to 2.5% during 2020 to 2022 are still rolling off those deals. As they refinance onto products reflecting today's rate environment, the blended effective rate across all outstanding mortgages rises — irrespective of what the Bank of England does next. The OBR estimates roughly 1.8 million fixed-rate mortgages will expire through 2026 alone, each one repricing into a world where 4% is considered cheap and 5% is commonplace.

What It Means for Property Investors

For investors with multiple properties financed on expiring fixed-rate deals, the implication is direct: refinancing costs are going up even if base rate stays flat or dips. A landlord who fixed at 2.5% in 2021 on a £300,000 buy-to-let mortgage was paying roughly £625 per month on an interest-only basis. At today's typical five-year fixed rate of around 5%, the same mortgage costs approximately £1,250 per month — a doubling of finance costs that cannot be passed on in full to tenants without breaching market rent thresholds.

This recalibration is already showing up in portfolio stress. The OBR's increased unemployment forecast — peaking at 5.3% in 2026 before gradually declining to 4.1% by 2030 — adds a secondary pressure on rent affordability and void risk. Combine rising debt service costs with potential tenant income pressure and the arithmetic for highly leveraged landlords who have not yet repriced their portfolios becomes uncomfortable.

The one offset the OBR does offer is steady capital growth: house prices are expected to increase by approximately 16% cumulatively through to 2030/31. Coventry Building Society's calculations using the OBR projections suggest average UK house prices could climb from roughly £270,000 today to around £314,000 by the end of the decade. That is meaningful equity accretion for investors with sufficient leverage headroom and cash flow to hold.

The Strategic Response for Investors

The OBR's forecasts reinforce a position that experienced investors are already adopting: optimise the debt stack before rates normalise fully. Investors with substantial variable rate or tracker exposure should be modelling the impact of a 4.5% blended cost scenario on their net yield position now, not when deals expire. Five-year fixed rates in the low 4% range remain available for lower loan-to-value propositions and locking in today whilst lenders compete aggressively for new business may represent better value than waiting for a base rate cut that could be delayed further by global uncertainty.

The planning data in the same OBR report provides a structural counterweight worth noting. Net additions to UK housing stock are forecast to fall to a decade low of 220,000 in 2026/27 before recovering only gradually towards 305,000 by 2030/31. Supply constraints of this magnitude, sustained over multiple years, create the rental demand foundations that make even modestly yielding assets financially viable over a medium-term hold. For investors who can absorb the refinancing transition, the underlying asset case remains intact.