UK mortgage growth to dip to 2.8% in 2026, after doubling this year

• UK mortgage lending growth to slow to 2.8% in 2026 from 3.2% this year, as affordability challenges and slowing real income growth impact homebuying demand, before picking back up to 3.2% in 2027
• UK business lending to grow 5.1% this year – up on 2.9% in 2024 – slow to 4% in 2026, then tick up in 2027 to 4.7%
• UK consumer credit lending to grow 5.6% in 2025 - down from 6.4% last year - and remain steady in 2026 and 2027

Following expected growth of 3.2% (net) this year, UK mortgage lending is forecast to slow in 2026 (2.8% net growth), as stretched affordability and a squeeze on real incomes drive a dip in housing demand, according to the latest EY ITEM Club Outlook for Financial Services.  

While housing affordability is likely to remain a challenge for the near future, lower interest rates and recovering real income growth should lead to a pickup in housing demand, and mortgage growth is forecast to rebound to 3.2% (net) in 2027 and outpace current growth by 2028 (3.4% net). 

Overall, while the UK economy is growing faster than expected this year (with GDP growth of 1.5% now forecast for 2025), speculation of tighter fiscal policy in the upcoming Budget, a challenged global economy, and reduced real income growth are all set to impact the banking sector in 2026. Total UK bank lending - across 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, if, as expected, interest rates fall, and consumer and corporate confidence improves.

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

UK business borrowing to decelerate due to fiscal tightening

Bank lending to UK businesses is expected to see a significant uplift in 2025 (5.1% net) - the strongest growth since 2020 when the Government announced loan support schemes during COVID-19 - as falling interest rates reduce the cost of new finance. However, with the upcoming Budget likely to bring further fiscal tightening, business lending growth is forecast to slow to 4% (net) in 2026.

Demand for business loans is expected to then pick back up across 2027 and 2028 (with growth rates of 4.7% net and 5.1% net forecast respectively), as interest rates and borrowing costs likely fall and uncertainty pares back, giving businesses the confidence to take advantage of healthy balance sheets.   

UK consumer credit demand to remain steady in 2026, following a slowdown in 2025 

UK unsecured credit is set to grow by 5.6% (net) in 2025, a drop on the 6.4% (net) recorded in 2024. With consumer credit remaining expensive, the EY ITEM Club forecasts growth will remain steady in 2026 (5.6% net), and slow to 5.3% (net) in 2027 and 4.9% (net) in 2028.

Default rates to stabilise amid improving economic conditions 

Write-off rates on UK mortgages are expected to fall to 0.001% in 2025 (from 0.004% in 2024) with the EY ITEM Club forecasting a marginal rise to 0.002% in 2026 and 0.003% in 2027 and 2028, as a number of homeowners on fixed rate mortgages refinance onto deals with higher mortgage rates.

Write-off rates on loans to UK businesses are expected to remain low at 0.17% in 2026, 2027 and 2028 (in line with 0.17% in 2024 and 2025), as corporate balance sheets remain healthy and debt interest costs decrease. 

Defaults on UK consumer loans are also expected to remain low, although there will be a marginal increase of 1.0% across 2026, 2027 and 2028 (from 0.9% over 2024 and 2025) due to the deteriorating jobs market. 

Dan Cooper, EY UK & Ireland Head of Banking and Capital Markets, comments: “The past few years have posed significant challenges for UK banks and their customers. While 2025 has offered some relief, the outlook for next year indicates further drawbacks. Ongoing uncertainty following the Budget could dampen business confidence and weigh down consumer demand, triggering a slowdown in bank lending activity. That said, the longer-term outlook offers more optimism; lower interest rates and strengthening real income growth are expected to boost demand for mortgages and business loans over 2027 and 2028, and default rates are expected to remain low. 

“The next phase of banking transformation will be defined by technology. Provided balance sheets remain healthy, banks will be well-positioned to leverage AI to streamline operations, enhance resilience and navigate the challenges ahead.” 

Insurance premium incomes to slow over 2026

The EY ITEM Club forecasts a slowdown in both non-life and life insurance gross premiums next year. For general insurers, car insurance premiums have been on the rise since February 2025, and this is set to continue in 2026 but at a slower pace, with the cost of replacement parts now back to normal post-pandemic, and as the economy weakens. Home insurance premiums have seen a decline in 2025, as the cost of replacing large household items - which spiked during the pandemic due to supply chain issues - has reduced. As real income growth softens, non-life premium growth overall is forecast to slow from 4.6% in 2025 to 3.6% in 2026, and drop back further to 3.4% and 3.2% respectively in 2027 and 2028.

Similarly, life insurance gross premiums are forecast to slow from 4.5% in 2025 to 3.0% in 2026, as squeezed household budgets and a loosening labour market will likely dampen demand for life insurance, despite some cushioning from reduced savings rates. While employment growth will slow, the number of individuals with workplace pensions is still expected to rise, and overall, a modest recovery of 3.4% is expected in 2027 and 2028.

UK AUM set for modest growth after trade tensions impacted 2025 growth rate

UK assets under management (AUM) are set to grow just 2% in 2025 (down from 4.4% in 2024) with financial markets impacted following April’s unexpected tariff announcements and greater concerns over fiscal stability in the major economies. More conciliatory trading relationships, supported by the healthy performance of AI-focused shares, have led to a recovery in global equity prices over the course of the year, although fiscal concerns caused bond prices to fall, which has offset some of the rising equity price benefits.

Looking ahead, a gradual rise in bond prices is expected which, when combined with equity growth, will see the pace of AUM growth pick up. The EY ITEM Club forecasts more stable growth of 4.3% in 2026, 4.6% in 2027 and 4.4% in 2028.

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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