Mortgage lending set to grow 1.6% this year as housing affordability improves

Mortgage lending is set to grow 1.6% this year (up from – 0.1% in 2023), 2.6% in 2025 and 3.3% in 2026, as housing affordability improves according to new analysis by EY ITEM Club.

The forecast is on the proviso that inflation and interest rates continue to gradually fall following August and November’s Bank of England rate cuts and despite the immediate market response to the Autumn Budget. Borrowing appetite is expected to increase as the cost of capital lowers. As a result, the EY ITEM Club forecasts total bank loans to UK households will grow 2.6% (net) this year, 3.7% (net) in 2025 and 4.3% (net) in 2026.

The UK economy is set for steady growth over the next two years, with GDP forecast to rise 0.9% in 2024, 1.5% in 2025 and 1.6% in 2026. This economic recovery is expected to feed through to the banking sector as interest rates fall and appetite to borrow strengthens over time.

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “The UK’s macroeconomic environment has been extremely challenging in recent years, but it appears we are now turning a corner. Although we are yet to see the full economic response to the Autumn Budget and the US election, deepening signs of economic recovery are giving firms and households increasing reason for optimism. Falling inflation and interest rate cuts should boost borrowing appetite over time, and the outlook for bank lending in the UK is more positive than it has been in a number of years.

“While this outlook is promising, optimism should remain measured. If recent history has taught us anything, it is that economic shocks can come at any time. The UK financial services industry must continue to shore up its capital strength while investing in key strategic areas to ensure it capitalises on growth opportunities and maintains its position on the international stage.”

Borrowing appetite of UK households is beginning to pick up following August and November’s interest rate cuts and as housing affordability improves. As a result, the EY ITEM Club forecasts growth of 1.6% (net) in UK mortgage lending in 2024 – a return to growth following the -0.1% contraction in 2023. Providing interest rates continue to be gradually cut as predicted, the EY ITEM Club forecasts UK mortgage lending to grow further to 2.6% (net) in 2025 and 3.3% (net) in 2026.

UK unsecured credit lending is expected to grow 8.6% (net) in 2024 – rising from 6.1% in 2023 – driven by stabilising inflation and steady wage growth. These conditions are expected to largely persist over the next two years, and the EY ITEM Club forecasts unsecured lending to remain strong but ease back to 6.5% (net) in 2025 and 2026.

Write-off rates on UK mortgages are forecast to rise slightly to 0.004% in 2024 (from 0.002% in 2023), before easing back to 0.002% in 2025 and 0.003% in 2026, driven by low unemployment and household income growth.

Defaults on UK consumer loans are also expected to remain low, due to high employment and the savings built up during the pandemic strengthening the health of household finances. The 2024 rate is forecast to remain unchanged at 0.9%, before rising marginally to 1.0% in 2025 and in 2026.

Dan Cooper, UK Head of Banking and Capital Markets at EY, said “Accelerating growth in lending is welcome news to UK banks, which have recently reported better-than-expected third quarter results. The expectation that loan defaults will stabilise is also positive, and will provide a further boost to banks’ balance sheets.

“The positive sentiment around economic recovery and a resultant forecast rise in lending means firms can take the opportunity to strengthen their capital reserves and re-focus on longer-term strategic transformation initiatives.”