Press release

6 Nov 2023 London, GB

Decade-low mortgage growth forecast into 2024, as high borrowing rates and low economic growth drive down demand

UK mortgage lending is expected to record decade-low growth in 2023 and 2024, according to the latest EY ITEM Club Outlook for Financial Services, as mortgage rates reach their highest since 2008

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  • UK mortgage lending forecast to grow just 1.5% (net) in 2023 and 2% (net) in 2024 – the lowest growth over a two-year period in a decade – with only slightly higher growth of 2.8% (net) forecast in 2025
  • Demand for consumer credit to rise 6.1% (net) in 2023 – driven by a fall in repayments – before slowing to 5% (net) in 2024 and 4.3% (net) in 2025
  • Bank-to-business lending forecast to contract 0.5% (net) in 2023, before returning to growth of 1.8% (net) in 2024 and 3.7% (net) in 2025
  • UK AUM forecast to rise 3.3% in 2023, following last year’s 11.8% fall, with growth of 2.1% expected in 2024 and 5.7% growth forecast in 2025
  • Non-life premium income forecast to rise 8.5% in 2023, slowing to 5.1% in 2024 and 4.1% in 2025 with life premium income set to increase 6.6% in 2023, 5.7% in 2024 and 4.4% in 2025

UK mortgage lending is expected to record decade-low growth in 2023 and 2024, according to the latest EY ITEM Club Outlook for Financial Services, as mortgage rates reach their highest since 2008, economic growth remains subdued and weakening housing market sentiment drives down demand. Overall, mortgage loans in 2023 are expected to rise just 1.5% (net) and 2% (net) in 2024, representing the slowest growth in ten years.

Across the UK economy, sustained headwinds from high interest rates and inflation, and a weaker-than-anticipated labour market are expected to continue driving sluggish GDP growth for the remainder of 2023 and into 2024. In addition, developments in the Middle East and the ongoing war in Ukraine present an ongoing downside risk to the forecast, with a very real potential of further falls in consumer and business confidence and appetite to borrow, at least in the short-term.

Anna Anthony, UK Financial Services Managing Partner at EY, comments: “The UK is still on track to avoid recession this year, but the economic environment remains challenging. Significant cost of living pressures continue to affect households’ ability to spend, and an increasing number are finding it difficult to keep up with loan repayments. At the same time, businesses’ appetite to borrow and invest has been affected by high borrowing rates. This slowdown in the flow of capital is being felt across the country; from individuals pulling back on daily expenses and putting off home-buying plans, through to banks and asset managers managing low growth portfolios.

“Escalating geopolitical tensions around the world are another cause for concern, and it will be prudent for financial institutions to be prepared for further dips in consumer and business confidence, and to ensure they are doing all they can to support customers through these challenging times.”

Total UK bank loans set for modest growth in 2023

Total UK bank loans are expected to rise by only 1.5% this year – a minor upgrade from a 1.2% forecast in May, but significantly lower than the 3.3% averaged during the pre-pandemic years of 2015-2019. Gradual pick-up in growth is expected in 2024 (2.3%) and 2025 (3.2%).

Mortgage demand falls to lowest level in a decade   

Subdued housing market sentiment and higher borrowing costs has led net mortgage lending to average just £0.3bn per month from January to September 2023. This compares to £5.7bn in same period in 2022, at a time when mortgage approvals were around 40% higher. The forecast of 1.5% growth for 2023 is the weakest since 2011.

The EY ITEM Club expects mortgage demand to pick up over 2024 and 2025 provided inflation continues to fall, the Bank of England cuts interest rates next year, and housing affordability improves. Overall, mortgage lending is forecast to grow 2% next year and 2.8% in 2025. These figures remain very low in historical terms and sit far below the 3% averaged during the pre-pandemic years of 2015-2019.

Consumer credit to rise in 2023, supported by fall in repayments

Net unsecured lending is forecast to rise 6.1% in 2023, which is the strongest growth since 2017, in part driven by a fall in repayments in recent months. The EY ITEM Club predicts unsecured lending growth will slow to 5% in 2024 and 4.3% in 2025.

Weak UK business lending to continue into 2024

Bank-to-business lending is forecast to contract 0.5% (net) this year, as economic challenges and high borrowing costs dampen businesses’ appetites to borrow. Net lending to SMEs has been much weaker than to larger businesses this year, with the latest Bank of England data showing loans to SMEs were 3.9% lower in September compared to the start of 2023, while the stock of loans to larger businesses was 2.4% higher.

Growth is forecast to return in 2024 at 1.8%, and the EY ITEM Club expects a larger rise of 3.7% in 2025 as the economic climate is forecast to improve and business investment is boosted by government tax incentives.

Default rates on the rise, but should remain well below historic peaks

Higher mortgage rates have triggered a small rise in impairments, with write-off rates forecast to rise from 0.002% of total mortgage loans in 2022 to 0.015% this year and just over 0.02% in 2024 and 2025. This would be the highest since 2015, but well below the peak of 0.08% post financial crisis in 2009.

Write-off rates on consumer loans have not yet been significantly affected by higher interest rates or a subdued economy, and are forecast to rise 1.2% this year, unchanged from 2022, and 1.7% in 2024, before dipping slightly to 1.6% in 2025. In comparison, write-off rates peaked at 5% of unsecured loans in 2010. 

Impairments on business loans are also expected to rise only marginally as many businesses have been paying down debt at a material rate, and the majority of SME debt taken on during the pandemic was issued via low-rate government-guaranteed loan schemes. Overall, write-off rates are forecast to reach 0.3% in 2023, 0.6% in 2024 and dip slightly to 0.5% in 2025; still a long way short of rates of 1%-1.5% in the early 2010s.

Dan Cooper, UK Head of Banking and Capital Markets at EY, comments: “The ‘higher for longer’ borrowing rates and ongoing cost of living pressures are continuing to have a very real impact on customers, and at the same time, banks are tightening their lending criteria. Firms are also watching impairment levels closely, particularly as fixed-rate mortgages roll onto higher interest rates. However, the combination of tighter regulation imposed post-2008, additional support from lenders, and household savings built up during the pandemic should help keep defaults to a minimum.

“Banks are actively working to retain a strong capital position and support their customers in this challenging market. With interest rates now expected to peak at a lower level than previously predicted, we should see a gradual improvement in consumer and business confidence over the next two years, leading to greater appetite to borrow.”

Non-life premium income to grow, but rising premiums will impact demand into 2024

Non-life premium income is forecast to grow 8.5% this year, up from 3.9% in 2022. This would be the largest rise since 2016, driven by premium price increases and some recovery in demand for big-ticket, insurable item purchases, as household finances begin to benefit from falling inflation and a recovery in real wages. In addition, the new car market has recently picked up, and car registrations in 2023 are on course to deliver the second year-on-year rise since 2016. Rising premium prices, however, will likely affect demand for personal insurance into next year, and growth is forecast to slow to 5.1% in 2024 and 4.1% in 2025.

Life premium income to rise as improved outlook boosts spending power

The EY ITEM Club has upgraded its forecast for life insurance premiums in 2023, predicting a rise of 6.6% this year, up from a 2% contraction expected in the last forecast in February, as the improved outlook for household spending lifts demand. In 2024, life premiums are expected to rise 5.7% in 2024 and in 4.4% in 2025.

UK AUM set for modest growth

2023 has been challenging for fixed income assets so far – though this has been offset by modest growth in equity prices – while inflows into UK AUM in the first three quarters of 2023 remained positive. The EY ITEM Club forecasts a 3.3% rise in assets under management (AUM) in 2023, but this only partially compensates for last year’s 11.8% fall. The prospect of ‘higher-for-longer’ interest rates globally is likely to contribute to bond, equity and commercial property values being held back in 2024, meaning UK AUM is only forecast modest growth of 2.1% next year, before rising to 5.7% in 2025.

Anna Anthony concludes: “The financial services industry has experienced a sustained period of low growth since the financial crisis and has had to weather a number of particularly strong economic shocks in recent years. We’re certainly not out of the woods yet, and insurers, asset managers and banks alike are having to shore up their balance sheets, while keeping on the path of transformation and maintaining a careful eye on cost bases, as well as continuing to support customers through these difficult times.

"Despite the challenges, the UK financial services sector remains robust and resilient, continuing to be a leading player on the world stage and firmly focused on driving the agenda on sustainability, technology innovation and governance.”

Notes to editors

This forecast only covers institutions regulated to take deposits in the UK, which currently excludes Buy Now Pay Later products which have recently grown at a significant rate.

Business loans taken out during the pandemic under the Bounce Back scheme don’t have to repaid until 2026 (or 2030 in some cases as certain loan terms have been extended). However, important to note that banks won’t be liable should any firms default on these loans, as any losses will be covered by the government under the scheme.

UK AUM is defined as funds where 60% or more of assets are held by UK-domiciled investors.

About EY ITEM Club

The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP. 

ITEM stands for Independent Treasury Economic Model. HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM’s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures.  Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not.  

EY Economics for Business provides knowledge, analysis and insight: helping businesses understand the economic environments in which they operate, both in the UK and globally. Find out more