UK mortgage lending growth set to double in 2025 as falling interest rates revive market
The growth rate in the value of UK mortgage lending is set to double in 2025, following two years of little-to-no increases, according to a forecast.
Falling interest rates and rising consumer confidence will boost housing market activity, the EY ITEM Club 'outlook for financial services' suggests.
UK mortgage lending growth is forecast to increase from 1.5 per cent net in 2024 to 3.1 per cent net in 2025.
But with rising house prices and high mortgage rates persisting, mortgage lending growth is expected to be steady after this year, with net growth forecast at 3.2 per cent in 2026 and 3.6 per cent in 2027.
Martina Keane, EY UK & Ireland financial services leader, said: '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.'
The EY ITEM Club forecasts write-off rates on UK mortgages will decrease to 0.001 per cent in 2025, from 0.004 per cent in 2024, as borrowing rates fall, before rising slightly to 0.002 per cent in 2026 and 2027.
The report also said demand for business loans is expected to rise as interest rates and borrowing costs continue to fall.
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The EY ITEM Club forecasts UK bank-to-business lending to grow 4.5 per cent net this year – the strongest growth since 2020 when the government announced loan support schemes during Covid-19.
But this expectation is still a downgrade from a previous 5.6 per cent net forecast by the EY ITEM Club in November 2024.
The less optimistic outlook is due to upcoming tax changes, tighter financial conditions and global trade uncertainty being expected to weigh on private sector confidence and investment in the first half of 2025.
Dan Cooper, EY UK head of banking and capital markets, said: '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.'
He added: '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.'
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