UK mortgage lending growth is set to more than double in 2025, according to a major economic forecasting group, as inflation eases and the Bank of England is expected to cut interest rates this year.
The EY ITEM Club’s latest financial services forecast predicted UK mortgage lending would grow just 1.5 per cent this year.
Despite showing recent signs of recovery, with mortgage approvals rising for the fifth straight month in February, home-buying demand and house prices remain weighed down by inflationary pressures and elevated mortgage rates.
However, the EY ITEM Club anticipated growth of 3.2 per cent in 2025 and three per cent in 2026 as falling inflation boosts household spending power and the Bank of England lowers its base rate. The group expects the Bank to lower interest rates to 4.5 per cent by the end of this year.
Its report said total UK bank loans were set for a similar trajectory, set to grow just 1.7 per cent in 2024, from flat growth in 2023, before rising 3.2 per cent in both 2025 and 2026.
Anna Anthony, UK Financial services managing partner at EY, said: “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.”
Lending to UK businesses contracted by 2.1 per cent in 2023. The EY ITEM Club anticipated a return to growth this year, albeit just 0.5 per cent as high interest rates and economic uncertainty continue to drag on business sentiment.
As the economic picture improves, however, the group forecasted 2.8 per cent growth in business lending in 2025 and 3.4 per cent in 2026. It said this rise would also be driven by pressure on firms to invest in digitalisation and artificial intelligence.
Dan Cooper, UK head of banking and capital markets at EY, said: “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.”
The EY Item Club expected falling inflation in the sector to drive premium income growth for UK insurers down to a “normal” rate of seven per cent this year after a 8.7 per cent rise in 2023. It forecasted growth of 5.1 per cent in 2025 and 3.8 per cent in 2026.
It added that firms’ assets under management were expected to growth 3.1 per cent this year, down slightly from 3.4 per cent in 2023, as many investors have already factored in future global interest rate cuts.
The group predicted a rise to 5.6 per cent growth in 2025 as the economy rebounds, before another fall to 4.3 per cent in 2026 as more typical growth rates return.