Mortgage lending set to double in 2025

Mortgage lending growth is set to more than double in 2025, according to analysis by the EY Item Club. While the analysis predicts that lending will climb by just 1.5% this year, it anticipates growth of 3.2% in 2025 and 3% in 2026, with this expected to be driven by falling inflation and lower interest rates.

Mortgage lending is forecast to grow just 1.5% (net) in 2024, as stretched affordability and high borrowing rates continue to affect home-buying demand. However, growth is forecast to more than double year-on-year in 2025 – reaching 3.2% (net) – provided inflation continues to fall and interest rates are cut later this year as expected.

The after-effects of the economy’s recession in the second half of 2023 continue to weigh on GDP growth in 2024, but economic recovery is expected to gain momentum this year as falling inflation boosts household spending power and pressure from high interest rates begins to ease. However, rising geopolitical tensions in Europe and the Middle East continue to present material downside risk to confidence levels.

The EY ITEM Club forecasts total bank loans to households will grow just 1.7% (net) this year – a modest improvement from flat growth in 2023 – as high interest rates continue to impact demand. However, growth is forecast to rise to 3.2% (net) in both 2025 and 2026 as the economic recovery gathers pace.

Anna Anthony, UK Financial Services Managing Partner at EY, said “While we are hopefully beginning to see economic recovery in the UK, both households and businesses continue to face high borrowing costs. This of course has knock-on effects on bank lending, and activity in the housing market has been particularly impacted. High living and lending costs have meant fewer house purchases, and although we’re starting to see signs that activity is picking-up, we expect mortgage lending growth to be very low again this year.

“If inflation continues to fall and interest rates are cut in the coming months as expected, we believe economic recovery and market confidence will gain momentum in 2025. However, election uncertainty in the UK and in the US, alongside rising geopolitical tensions in the Middle East and Ukraine, mean potential risks to the downside remain very real.”

The housing market has shown signs of recovery in recent months, with mortgage approvals rising for the fifth consecutive month in February. However, borrowing costs remain high and stretched affordability will likely constrain demand, and the EY ITEM Club expects UK mortgage lending to grow just 1.5% (net) in 2024.

The pace of economic recovery is likely to accelerate over the course of this year and Bank Rate is expected to fall to 4.5% by the end of 2024 – with the first cut expected in the summer – which should lift consumer sentiment and drive a rise in housing demand in 2025. As a result, the EY ITEM Club forecasts growth in UK mortgage lending to more than double year-on-year in 2025 (3.2% net) and reach 3% (net) in 2026.

UK unsecured credit lending grew 6.1% (net) in 2023, due largely to inflation driving up the price of goods and cost-of-living pressures. However, with inflation continuing to fall and cost-of-living pressures beginning to ease, the EY ITEM Club forecasts growth will slow to 5.4% (net) in 2024, 4.5% (net) in 2025 and 4.2% (net) in 2026.

The EY ITEM Club forecasts write-off rates on UK mortgages to rise from 0.004% in 2023, to 0.01% in 2024, and 0.017% in 2025, as higher mortgage costs impact some borrowers’ abilities to meet repayments. While the 2025 figure is expected to be the highest level since 2015, low unemployment levels mean this remains well below the 0.032% figure averaged in the 2010s. Write-offs are forecast to fall to 0.01% in 2026 providing pressure from high interest rates eases.

Write-off rates on UK consumer loans averaged 1% in 2023, and while the EY ITEM Club expects a small rise in impairments this year as the effects of interest rate rises continue to feed through, unemployment is forecast to stay low and cost-of-living pressures are beginning to ease. As a result, the EY ITEM Club forecasts write-offs on consumer loans to rise to 1.6% this year – remaining well below the peak of 5% in 2010 – before falling to 1.4% in 2025 and 1.1% in 2026.

Dan Cooper, UK Head of Banking and Capital Markets at EY said “UK banks continue to operate in challenging market conditions and are facing another year of very low lending growth. The macroeconomic environment is tough both for businesses and households, and while inflationary pressures are beginning to ease, borrowing costs remain high, which is impacting customer appetite for loans. In addition, write-off rates are expected to rise this year, meaning UK banks must keep a careful eye on how customers – especially those most vulnerable – are managing.

“UK banks have proven their resilience and support to customers time and again in recent years, and as we look to another tough year ahead, this must continue while also balancing investment in longer-term strategic priorities, including the adoption of Generative AI and digital transformation to better serve customers.”