According to a report from the EY Item Club, UK mortgage lending growth contracted by 0.1 per cent net in 2023, but demand for housing loans is “expected to rebound this year, buoyed by the prospect of falling interest rates”.
The firm said that it expected the Bank of England (BoE) will reduce its base rate from 5.25 per cent to four per cent by the end of 2024.
This, along with falling inflation, will lead to the cost of home loans likely going down.
Due to falling mortgage rates, mortgage lending is expected to grow 2.2 per cent net this year, 3.4 per cent net in 2025 and 3.3 per cent net in 2026.
EY Item Club noted that rising unemployment and a rise in the number of mortgage-holders coming off fixed rate deals onto higher-priced deals had led to a “small rise in impairments”.
The company forecast write-off rates to average 0.013 per cent this year, a rise from 0.004 per cent in 2023.
This is predicted to go up to 0.016 per cent in 2025 and then dip to 0.014 per cent in 2026.
EY Item Club said that will write-off rates were expected to rise, but were still below the high of 0.08 per cent seen in the post-financial crisis era.
Largest growth expected in unsecured credit
Overall, EY Item Club said that total bank loans to households and businesses – which cover mortgages and consumer credit – is predicted to grow 2.2 per cent net this year, an increase from 0.6 per cent in 2023.
Looking ahead, growth is expected to rise to 3.5 per cent in 2025 before dipping slightly to 3.4 per cent in 2026.
“Despite entering into a technical recession in 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean UK GDP is expected to rise 0.9 per cent year, with further growth of 1.8 per cent in 2025 and two per cent in 2026 predicted.
“These green shoots of economic recovery are driving the forecast increase in both consumer and business borrowing this year and the next couple of years,” it said.
Within that, UK unsecured credit is predicted to increase by 6.1 per cent net in 2023, up from 4.2 per cent net in 2022, which is the fastest increase since 2017.
EY Item Club said this was “largely driven by inflation driving up the cost of goods and the cost-of-living crisis”.
The company said that, if inflation continues to fall in 2024, the demand for unsecured credit would “likely slow in tandem”.
The firm said that it expected consumer credit growth to slow to 5.2 per cent in 2024, to 4.2 per cent in 2025 and then go up slightly to 4.5 per cent in 2026.
Write-off rates on consumer loans are forecast to rise to 1.5 per cent this year, a slight rise from the one per cent averaged in 2023. This is due to “higher-for-longer” borrowing rates impacting people’s ability to pay.
This is expected to go down to 1.4 per cent in 2025 and 2026, which is below the peak of five per cent in 2010.
Dan Cooper, UK head of banking and capital markets at EY Item Club, commented: “There is no doubt that the economic environment has been extremely difficult for both businesses and households of late. While inflationary pressures are beginning to ease, borrowing costs remain high.
“Banks must continue to keep a close eye on how customers – particularly those most vulnerable – are managing, and on rising impairments, not least as fixed-rate mortgages roll onto higher rates this year.”
He added: “The banking sector continues to balance low levels of mortgage lending growth with the need to invest in strategic priorities and transformation objectives. While the economic climate is expected to improve this year, it will take some time to filter through the system and make a material difference to consumer and business sentiment.
“Despite this, banks must ensure that time, money and resources continue to flow into key areas to remain competitive, such as AI innovation and sustainability.”
