Growth in UK mortgage lending to double this year

• UK mortgage lending growth to more than double from 1.5% in 2024 to 3.1% in 2025, and grow to 3.2% in 2026, as rates fall and consumer confidence rises
• UK bank-to-business lending growth to increase from 2.9% in 2024 to 4.5% in 2025 – the highest rate since 2020 – and 5.6% in 2026 as borrowing rates continue to fall 
• Demand for consumer credit to remain steady, with growth of 5.8% in 2025 (down from 6.4% in 2024) and 6.8% in 2026

UK mortgage lending growth is forecast to more than double this year – up from 1.5% (net) in 2024 to 3.1% (net) in 2025 – as falling interest rates and rising consumer confidence boost housing market activity, according to the latest EY ITEM Club Outlook for Financial Services. However, with rising house prices and high mortgage rates persisting, mortgage lending growth is expected to be steady thereafter, with growth forecast at 3.2% (net) in 2026.

Overall, the UK’s economic recovery has been slower than expected, but growth is set to build steadily over the next two years, with GDP forecast to rise 1% in 2025 and 1.6% in 2026. This will feed through to the banking sector as interest rates continue to fall – as seen in February’s Bank Rate decision – and appetite to borrow strengthens over time. As a result, total UK bank lending is forecast to rise to 3.7% (net) this year (up from 2.3% in 2024) and 4.1% (net) in 2026 and 4.3% (net) in 2027.

UK mortgage lending growth to double this year as interest rates fall further

Following no growth in UK mortgage lending in 2023 (0% net), interest rate cuts, falling inflation and real income growth, boosted housing market activity in the second half of 2024. This resulted in modest mortgage lending growth of 1.5% (net) in 2024. 

With further, albeit gradual, interest rate cuts predicted this year, consumer confidence and appetite to borrow is also expected to grow, and the EY ITEM Club forecasts UK mortgage lending growth to more than double to 3.1% (net) in 2025. 

However, with rising house prices and high mortgage rates persisting, mortgage lending growth is expected to remain steady over the coming years, with growth forecast at 3.2% (net) in 2026 and 3.6% (net) in 2027.

Martina Keane, EY UK & Ireland Financial Services Leader, comments: “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. 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.” 

UK business borrowing to strengthen, though at a downgraded rate

Bank lending to UK businesses grew by 2.9% in 2024, as falling interest rates boosted market confidence in the second half of the year. Businesses borrowing was primarily driven by large firms, with loans to corporates increasing 3.9% (net) year-on-year in the twelve months to December 2024, while loans to SMEs contracted -1.9% (net) year-on-year to December 2024, as smaller firms continued to focus on repaying COVID-19 loans. 

Looking ahead, demand for business loans is expected to rise as interest rates and borrowing costs continue to fall. As a result, the EY ITEM Club forecasts UK bank-to-business lending to grow 4.5% (net) this year – the strongest growth since 2020 when the Government announced loan support schemes during COVID-19. However, the 4.5% (net) expectation is a downgrade from the 5.6% (net) forecast by the EY ITEM Club in November 2024 – downgraded due to upcoming tax changes, tighter financial conditions and global trade uncertainty being expected to weigh on private sector confidence and investment in the first half of 2025. 

If interest rates continue to gradually fall as expected, the EY ITEM Club forecasts UK bank-to-business lending to grow by 5.6% (net) in 2026 and 6.0% (net) in 2027.  

Consumer credit demand to remain steady as household spending remains strong 

UK unsecured credit grew by 6.4% (net) in 2024 – the highest growth since 2017 (8% net) – driven by stabilising inflation and steady wage growth. 

Consumer credit demand is expected to remain healthy as consumer caution eases and interest rates fall. As a result, the EY ITEM Club forecasts unsecured credit to grow by 5.8% (net) is forecast in 2025, 6.8% (net) in 2026 and 5.5% (net) in 2027.  

Default rates to stabilise due to falling borrowing costs and healthy balance sheets 

The EY ITEM Club forecasts write-off rates on UK mortgages to fall to 0.001% in 2025 (from 0.004% in 2024) as borrowing rates fall, before rising marginally to 0.002% in 2026 and 2027.

Write-off rates on loans to UK businesses are expected to remain low at 0.17% in 2025, 2026 and 2027 (in line with 0.17% in 2024), as corporate balance sheets remain healthy and debt interest costs lower. 

Defaults on UK consumer loans are also expected to remain low. The 2025 rate is forecast to remain unchanged at 0.9% (in line with 0.9% in 2024) due to continued high employment. The rate is forecast to rise marginally to 1.0% in 2026 and in 2027 as real income slows. 

Dan Cooper, EY UK Head of Banking and Capital Markets, comments: “There is no doubt that the macroeconomic climate of the past few years has been difficult for UK businesses and households, and this has an impact on the banks that support them. Looking to the year ahead, the increasingly positive outlook for lending and the prospect of relatively low default rates is welcome news for UK banks and their customers. While it’s important to remember that these growth rates are still a way off record-highs of past years, this forecast should provide a boost to banks’ balance sheets and provide some breathing space to focus on executing wider strategic priorities such as transformation and embracing new technologies.”

Insurance premium incomes to slow to ‘normal’ levels this year

For general insurers, demand for policies in 2025 is expected to be buoyed by strengthened consumer sentiment boosting the housing market, the purchase of big-ticket items, and the take up of associated insurance. At the same time, inflationary shocks that drove supply chain issues and high replacement part costs in recent years have eased, meaning firms can now lower premium increases. As a result, premium income for general insurers is set to return to more ‘normal’ levels of growth in the coming years, with the EY ITEM Club forecasting premium income growth of 5.2% in 2025 – down from 8.4% in 2024 – 4.3% in 2026 and 3.6% in 2027.

Sustained consumer demand will also continue support take-up of life insurance policies, alongside the growing workforce which will increase the number of workplace pensions. However, slowing household disposable income growth will impact overall growth levels over the coming years. As a result, the EY ITEM Club expects life insurance premium growth to fall to 4.4% in 2025 (from 5.8% in 2024), 3.3% in 2026 and 3.7% in 2027.

UK AUM growth set for modest growth as interest rates continue to fall

Equity and bond prices rose sharply throughout 2024 thanks to interest rate cuts, despite markets pricing fewer interest rate cuts in late-2024. As a result, UK assets under management (AUM) grew by 4.1% in 2024 – consistent with 4.1% growth in 2023. 

Looking ahead, further expected interest rate cuts should continue to support equity price growth, while the UK’s track record of high public debt and low growth mean bond yields will likely fall slowly. As a result, UK AUM are forecast for modest growth of 4.6% in 2025, 4.7% in 2026 and 5.1% in 2027.

Martina Keane concludes: “The UK’s financial services sector has proven its resilience time and again in recent years, and now, with economic recovery turning a corner, the industry is looking to the future with optimism. While geopolitical uncertainty persists, the UK’s financial services industry remains a leading force on the world stage, and will continue to prioritise support for customers while using this growth opportunity to drive strategic transformation and innovation.”

Notes to editors:

About the 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.

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