The EY Item Club Outlook for Financial Services said this followed flat growth in 2023, then a boost of housing market activity in the latter half of 2024, owing to interest rate cuts, falling inflation and real income growth.
The firm said gradual interest rate cuts expected this year would support consumer confidence and mortgage demand, but increasing house prices and relatively high interest rates would keep future mortgage lending growth steady – at a rate of 3.2% in 2026.
EY Item Club said default rates would stabilise and fall from 0.004% last year to 0.001% in 2025 as borrowing costs decline. This is then expected to rise slightly to 0.002% in 2026 and 2027.
Economic recovery resulting in demand for mortgage lending
Martina Keane, EY UK and Ireland’s financial services leader, said: “The UK’s gradual economic recovery is strengthening confidence and translating into more appetite to borrow from UK banks. Looking to the year ahead, if interest rates are cut further as expected, borrowing costs should fall, the capacity for household spending will grow, and stronger levels of mortgage borrowing should return after two years of little to no growth. However, optimism must remain measured.
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“We begin 2025 facing heightened geopolitical tensions and a sense of uncertainty around the impact of upcoming UK tax rises, presenting a very real downside risk to market confidence and the overall outlook for lending growth.”
More interest in insurance amid softer premium increases
EY Item Club said the demand for general insurance policies would be supported by stronger consumer sentiment in the housing market, meaning people would take out insurance alongside the purchase of “big-ticket items”.
Further, supply chain issues and high replacement part costs resulting from inflationary shocks have fallen away, meaning providers can offer lower premium increases.
The report stated that premium income for general insurers would return to normal levels of growth in the next few years, forecast to rise to 5.2% this year, down from 8.4% in 2024. It will then slow to 4.3% in 2026 and 3.6% in 2027.
There will also be a rise in the take-up of life insurance policies, alongside a growing workforce, which will drive up the number of workplace pensions.
However, household disposable income will grow at a slower pace and impact overall growth levels. EY Item Club said life insurance premium growth would fall to 4.4% this year, down from 5.9% in 2024, then down to 3.3% in 2026 and 3.7% in 2027.
