UK mortgage lending growth is forecast to more than double this year, an increase of 1.5% in 2024 to 3.1% in 2025, EY ITEM Club Outlook data reveals.
EY suggests the increase comes from falling interest rates and rising consumer confidence, which has boosted housing market activity in the second half of 2024.
In addition, with gradual interest rate cuts predicted this year, consumer confidence and appetite to borrow is also expected to grow.
However, with rising house prices and high mortgage rates persisting, mortgage lending growth is expected to remain steady over the coming years, with net growth forecast at 3.2% in 2026 and 3.6% in 2027.
Overall, the UK’s economic recovery has been slower than expected, but growth is set to build steadily over the next two years, with GDP forecast to rise 1% in 2025 and 1.6% in 2026.
EY says this will feed through to the banking sector as interest rates continue to fall and appetite to borrow strengthens over time.
As a result, total UK bank lending is forecast to rise to 3.7% this year, an increase from 2.3% in 2024, while it forecasts it will increase to 4.1% in 2026 and 4.3% in 2027.
Meanwhile, default rates are set to stabilise due to falling borrowing costs and healthy balance sheets.
EY forecasts write-off rates on UK mortgages to fall to 0.001% in 2025, from 0.004% in 2024. This comes as borrowing rates fall, before rising marginally to 0.002% in 2026 and 2027.
EY UK and Ireland Financial Services leader Martina Keane says: “The UK’s gradual economic recovery is strengthening confidence and translating into more appetite to borrow from UK banks.”
“Looking to the year ahead, if interest rates are cut further as expected, borrowing costs should fall, the capacity for household spending will grow, and stronger levels of mortgage borrowing should return after two years of little-to-no growth.”
“However, optimism must remain measured. We begin 2025 facing heightened geopolitical tensions and a sense of uncertainty around the impact of upcoming UK tax rises, presenting a very real downside risk to market confidence and the overall outlook for lending growth.”
EY UK head of banking and capital markets Dan Cooper adds: “There is no doubt that the macroeconomic climate of the past few years has been difficult for UK businesses and households, and this has an impact on the banks that support them.”
“Looking to the year ahead, the increasingly positive outlook for lending and the prospect of relatively low default rates is welcome news for UK banks and their customers.”
“While it’s important to remember that these growth rates are still a way off record-highs of past years, this forecast should provide a boost to banks’ balance sheets and provide some breathing space to focus on executing wider strategic priorities such as transformation and embracing new technologies.”
