Mortgage lending in the UK is poised to see a substantial boost in 2025, following two years of suppressed demand, according to the latest forecast from the EY ITEM Club. The forecast suggests that the growth rate in the value of UK mortgage lending will double in 2025, rising from 1.5% net in 2024 to an impressive 3.1% net in 2025. This surge is expected to be driven by falling interest rates and a rise in consumer confidence, both of which are expected to stimulate housing market activity.
Despite this optimism, however, the outlook remains cautious. With rising house prices and high mortgage rates continuing to persist, mortgage lending growth is projected to remain steady in the years following 2025. The EY ITEM Club forecasts a modest 3.2% net growth in 2026, followed by a slightly higher 3.6% in 2027.
A gradual economic recovery strengthens confidence
Martina Keane, the EY UK & Ireland financial services leader, highlighted that the gradual economic recovery in the UK is helping to restore confidence among consumers, leading to a greater appetite for borrowing from UK banks. As interest rates are expected to decrease further, borrowing costs will fall, which should boost household spending capacity and encourage stronger levels of mortgage borrowing after two years of little-to-no growth.
However, Keane also urged caution, noting that the UK is entering 2025 with heightened geopolitical tensions and uncertainty surrounding upcoming UK tax rises. These factors could present downside risks to market confidence and potentially dampen the overall outlook for lending growth.
Decline in write-off rates
The EY ITEM Club also predicts that write-off rates on UK mortgages will decrease significantly, dropping to just 0.001% in 2025, down from 0.004% in 2024. This reduction is expected to be a result of falling borrowing rates, which will reduce the financial strain on borrowers. However, write-off rates are projected to rise slightly to 0.002% in 2026 and 2027, reflecting ongoing economic uncertainties.
This forecast points to a more favourable lending environment for banks and borrowers alike. The forecasted decline in write-off rates suggests that fewer people will be struggling to repay their mortgages, providing a greater sense of financial security for both individuals and the wider economy.
Growth in business loans
The report also indicates that demand for business loans in the UK is expected to rise as interest rates and borrowing costs continue to fall. Bank-to-business lending is forecast to grow by 4.5% net this year, marking the strongest growth since 2020, when government-backed loan support schemes were introduced during the COVID-19 pandemic.
However, the latest forecast also reflects a slight downgrade from previous expectations. The EY ITEM Club had initially forecast a 5.6% net growth in business lending for 2025, but this has been revised downward due to a range of factors, including upcoming tax changes, tighter financial conditions, and ongoing global trade uncertainties. These factors are expected to weigh on private sector confidence and investment, particularly in the first half of 2025.
Dan Cooper, EY UK’s head of banking and capital markets, remarked that the positive outlook for lending, combined with the expectation of relatively low default rates, is encouraging news for UK banks and their customers. He added that this forecast should provide a welcome boost to banks’ balance sheets and offer some breathing space for them to focus on executing wider strategic priorities, such as transformation and embracing new technologies.
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A measured optimism for the future
While the forecast for 2025 offers hope for a rebound in the mortgage lending market, it also calls for measured optimism. The overall economic landscape remains uncertain, and the potential for geopolitical risks and tax changes to impact consumer and business confidence cannot be ignored. The future of the housing market and lending growth will depend on a range of factors, and a cautious approach will be necessary to navigate any potential challenges that lie ahead.
As the UK continues to recover from the impacts of the pandemic and other global economic pressures, the outlook for 2025 appears positive, but tempered by the need for careful monitoring of market conditions.
