The latest EY Item Club data attributed the lower lending growth forecast to “stretched affordability and a squeeze on real incomes driv[ing] a dip in housing demand”.
The report noted that mortgage growth is expected to rebound to 3.2% net growth in 2027 and hit 3.4% net growth in 2028, outpacing this year’s current growth.
EY Item Club said that while the UK economy is growing faster than expected, with gross domestic product (GDP) growth projected at 1.5% for 2025, speculation around policies in the Budget, a challenged global economy and reduced real income will impact the banking sector in 2026.
Total UK bank lending – which encompasses mortgages, business borrowing and consumer credit – is expected to fall from 3.8% net growth this year to 3.3% in 2026.
In line with GDP, total bank lending is then expected to pick back up in 2027 and 2028 – at 3.7% net and 3.9% net forecast growth respectively. However, this is if interest rates fall and consumer and corporate confidence improves.
Mind the affordability gap
Sponsored by Newcastle for Intermediaries
The report added that write-off rates on UK mortgages are expected to fall to 0.001% in 2025, compared to 0.004% in 2024.
EY Item Club is projecting a “marginal rise” to 0.002% in 2026 and 0.003% in 2027 and 2028 in terms of write-off rates for mortgages.
This was attributed to more homeowners on fixed rate mortgages refinancing onto deals with higher mortgage rates.
Martina Keane, EY’s UK and Ireland financial services leader, said: “The UK economy made a strong start to 2025, but momentum is slowing and we are facing a challenging market.
“Ongoing global uncertainty and the prospect of further domestic tax rises in the upcoming Budget are likely to impact the financial services sector next year. However, our industry is resilient and adaptable, and our fundamentals remain solid. A dip in 2026 is likely to be temporary, and as uncertainty recedes, growth levels across most of the UK financial services sectors will improve over 2027 and 2028.
“With a more promising longer-term outlook ahead, now is not the time to slow down. Leaders should continue focusing on major strategic priorities such as technology, AI and wider business transformation to help drive efficiencies and enhance value for customers.”
