An analysis from EY Item Club said lower interest rates would see net mortgage lending continue to increase, with a further growth of 2.6% in 2025 and 3.3% in 2026.
EY Item Club also predicted that default rates would stabilise along with a fall in borrowing costs. It said write-off rates on mortgages would first rise slightly from 0.002% last year to 0.004% in 2024. Then, this would ease to 0.002% in 2025 and 0.003% in 2026. The firm said this would be driven by low unemployment and household income growth.
Dan Cooper, UK head of banking and capital markets at EY, said: “Accelerating growth in lending is welcome news to UK banks, which have recently reported better-than-expected third quarter results. The expectation that loan defaults will stabilise is also positive, and will provide a further boost to banks’ balance sheets.
“The positive sentiment around economic recovery and a resultant forecast rise in lending means firms can take the opportunity to strengthen their capital reserves and re-focus on longer-term strategic transformation initiatives.”
Its analysis also suggested lending to businesses would rise over the next three years, while demand for consumer credit would stay strong this year before easing in the following two years.
How the housing landscape is set to shift
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Life insurance premium income growth to slow
EY Item Club said the rise in life insurance premiums would fall to 6.2% this year, down from 6.9% in 2023. The firm attributed this to a slowdown in household disposable income over the next three years.
It predicted this would decline to 4% in 2025 then 2.9% in 2026.
Non-life insurance premium growth will also return to normal rates, EY Item Club said, rising to 7.9% this year down from 8.8% in 2023.
It said lower interest rates, better consumer confidence and steady income growth would back the demand for policies over the next two years, but non-life insurance premium income will drop to a normal rate of growth of 5% in 2025 and 4.5% in 2026.
Improved UK economy
EY Item Club forecasts “steady growth” in the UK economy over the next two years, with GDP predicted to rise 0.9% in 2024, 1.5% in 2025 and 1.6% in 2026.
This will feed through to the banking sector as interest rates fall and borrowing demand rises.
Anna Anthony, UK financial services managing partner at EY, said the UK economy was “turning a corner” and while the full response to the Autumn Budget and US election was yet to be seen, “deepening signs of economic recovery are giving firms and households increasing reason for optimism”.
Anthony added: “While this outlook is promising, optimism should remain measured. If recent history has taught us anything, it is that economic shocks can come at any time.
“The UK financial services industry must continue to shore up its capital strength while investing in key strategic areas to ensure it capitalises on growth opportunities and maintains its position on the international stage.”
She added: “The UK’s financial services sector has remained resilient amid challenging macroeconomic conditions in recent years. While the light at the end of the tunnel appears to be drawing closer, ongoing geopolitical tensions in particular present downside risks to the forecast.
“As ever, UK banks, insurers and asset managers must continue to support customers, keep a careful eye on evolving geopolitical events, and make strategic investments for the future.”
