UK mortgage lending is forecast to grow just 1.5% (net) in 2024, according to the latest EY ITEM Club Outlook for Financial Services.

It says 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 UK 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.

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “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.