UK mortgage lending to grow just 1.5% in 2024, but more than double in 2025

• Mortgage lending forecast to grow 1.5% (net) this year, before rising to 3.2% (net) in 2025, as interest rates fall and the economic outlook improves

• Bank-to-business lending forecast to grow just 0.5% (net) this year, before rising to 2.8% (net) in 2025, as lower borrowing costs boost demand

• Unsecured lending forecast to grow 5.4% (net) this year, but slow to 4.5% (net) in 2025, as inflation continues to fall and cost of living pressures ease 

• UK AUM forecast to rise 3.1% in 2024 and 5.6% in 2025, as falling interest rates globally support asset values

• Non-life insurance premium income forecast to rise 7% in 2024 and 5.1% in 2025, and life insurance premium income to increase 5.9% in 2024 and 4.7% in 2025

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

Total UK bank loans set for low growth in 2024

The EY ITEM Club forecasts total bank loans to UK businesses and households will grow just 1.7% (net) this year – a modest improvement from flat growth in 2023 – as high interest rates continue to impact demand. However, growth is forecast to rise to 3.2% (net) in both 2025 and 2026 as the economic recovery gathers pace. 

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.”

Mortgage demand to remain weak in 2024, but lending growth to double YOY in 2025

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.  

UK business lending to record marginal growth in 2024, but rise sharply in 2025 

Lending to UK businesses contracted in 2023 (-2.1% net), and while growth is forecast this year, sustained high borrowing costs and macroeconomic and geopolitical uncertainty mean it will likely be subdued. The EY ITEM Club forecasts lending to UK businesses to grow just 0.5% (net) this year.

Business sentiment is expected to improve throughout the course of this year as the economic outlook improves and provided the Bank of England cuts interest rates. 

As businesses are compelled to increase their level of digitalisation, develop artificial intelligence (AI) technologies and move further towards green energy generation, the EY ITEM Club expects a boost in borrowing to fuel investment. As a result, UK business lending is forecast to grow 2.8% (net) in 2025 and 3.4% (net) in 2026.  

Consumer credit demand set to slow as inflation continues to fall

UK unsecured credit lending grew 6.1% (net) in 2023, due largely to inflation driving up the price of goods and cost-of-living pressures. However, with inflation continuing to fall and cost-of-living pressures beginning to ease, the EY ITEM Club forecasts growth will slow to 5.4% (net) in 2024, 4.5% (net) in 2025 and 4.2% (net) in 2026.

Default rates are set to rise, but from low levels 

The EY ITEM Club forecasts write-off rates on UK mortgages to rise from 0.004% in 2023, to 0.01% in 2024, and 0.017% in 2025, as higher mortgage costs impact some borrowers’ abilities to meet repayments. While the 2025 figure is expected to be the highest level since 2015, low unemployment levels mean this remains well below the 0.032% figure averaged in the 2010s. Write-offs are forecast to fall to 0.01% in 2026 providing pressure from high interest rates eases. 

Write-off rates on loans to UK businesses averaged 0.17% in 2023 and are forecast to rise to 0.2% each year from 2024 to 2026, driven by higher borrowing costs. However, these impairment levels also remain well below 1%-1.5% seen in the early 2010s, as many firms have chosen to pay down their debt since the global financial crisis. 

Write-off rates on UK consumer loans averaged 1% in 2023, and while the EY ITEM Club expects a small rise in impairments this year as the effects of interest rate rises continue to feed through, unemployment is forecast to stay low and cost-of-living pressures are beginning to ease. As a result, the EY ITEM Club forecasts write-offs on consumer loans to rise to 1.6% this year – remaining well below the peak of 5% in 2010 – before falling to 1.4% in 2025 and 1.1% in 2026.  

Dan Cooper, UK Head of Banking and Capital Markets at EY, comments: “UK banks continue to operate in challenging market conditions and are facing another year of very low lending growth. 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. 

“UK banks have proven their resilience and support to customers time and again in recent years, and as we look to another tough year ahead, this must continue while also balancing investment in longer-term strategic priorities, including the adoption of Generative AI and digital transformation to better serve customers.” 

Non-life insurance premium income to continue to grow over the next three years, but at slowing rate 

Lower insurance price rises – driven by falling inflation in the sector – will see premium income growth for UK insurers decline this year after a high growth rate in 2023 (8.7%). As a result, the EY ITEM Club expects non-life premium income to fall to more ‘normal’ growth rates of 7% this year, 5.1% in 2025 and 3.8% in 2026. 

Life insurance premium income growth to slow over the next three years

While demand for life insurance products will benefit from an improved outlook for household incomes and faster-than-expected increases in the total UK population and those aged over 60, the strong growth in workplace pensions since autoenrollment began in 2012 is beginning to level off. As a result, the EY ITEM Club expects life insurance premium growth for UK insurers to fall from 6.9% in 2023, to 5.9% in 2024, 4.7% in 2025 and 4% in 2026. 

UK AUM set for modest growth in 2024

Assets under management (AUM) are forecast to grow 3.1% in 2024, down slightly from 3.4% in 2023, as many investors have already factored in future global interest rate cuts. Higher growth of 5.6% is predicted in 2025 as the economy rebounds, boosting household finances and supporting inflows into AUM. Growth is then set to slow to 4.3% in 2026, as more typical growth rates return following the initial response to economic recovery.

Anna Anthony concludes: “The UK’s financial services industry remains robust amid extremely challenging macroeconomic conditions. This year, again, its strong foundations and capital position will ensure it remains resilient and forward-looking. With signs that economic momentum will build in 2025, cautious optimism is rising, and firms can increasingly look to accelerate their growth and innovation agendas. Of course, amid ongoing economic and geopolitical uncertainty, insurers, asset managers and banks will be keeping a careful eye on their costs and balance sheets this year, while also safeguarding customer interests and investing in transformation to ensure the UK’s financial sector retains its competitiveness on the international stage.”

Notes to editors:

This forecast only covers institutions regulated to take deposits in the UK, which currently excludes Buy Now Pay Later products which have recently grown at a significant rate.

Business loans taken out during the pandemic under the Bounce Back scheme don’t have to repaid until 2026 (or 2030 in some cases as certain loan terms have been extended). However, important to note that banks won’t be liable should any firms default on these loans, as any losses will be covered by the government under the scheme.

About EY ITEM Club

The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP.  
 
ITEM stands for Independent Treasury Economic Model. HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM’s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures.  Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not.  

EY Economics provides knowledge, analysis and insight: helping businesses understand the economic environments in which they operate, both in the UK and globally. Find out more ey.com/uk/economics