UK homebuyers could face more than £1,100 a year in additional mortgage costs by December 2026 as higher energy prices increase expectations for further Bank of England interest-rate rises, according to Capital Economics.
The consultancy now expects the average rate on a new mortgage to reach 4.8% by the end of 2026, up about 0.8 percentage points from its previous forecast.
For a buyer purchasing an average-priced home in December 2026 with a 20% deposit, that would add around £95 a month, or £1,134 a year, taking estimated monthly mortgage payments to about £1,268. Over five years, the additional cost would total roughly £5,670 compared with Capital Economics’ previous assumptions.
The forecast follows the Bank of England’s warning that rates may need to rise if the Middle East conflict continues to push energy prices and inflation higher. Markets are currently pricing an 88% chance of a rate increase at the Bank’s November 2026 meeting and have priced in four increases by July 2027, which would take Bank Rate from 3.75% to 4.75%.
Capital Economics is less aggressive, forecasting two Bank Rate increases to 4.25%, but has also raised its expectations for government bond yields, which feed into mortgage pricing.
The pressure is expected to persist into September 2027, when Capital Economics forecasts an average mortgage rate of around 4.5%, approximately 0.7 percentage points above its previous estimate. That would add about £83 a month, or £996 a year, for a typical buyer.
Around 1.5 million borrowers taking out new mortgages between now and the end of 2028 could therefore be affected by higher borrowing costs.
Capital Economics said the prolonged affordability squeeze is also likely to weaken the housing market and indicated it may reduce its previous forecasts for house-price growth of 3.5% in the year to the fourth quarter of 2027 and 3.0% in the year to the fourth quarter of 2028.
The deterioration in the interest-rate outlook follows UK inflation rising to 3.1% in August 2026, with crude oil again above $100 a barrel as disruption to Middle Eastern energy supplies adds to inflationary pressure.
