Falling interest rates and growing consumer confidence set to drive housing market recovery
UK mortgage lending is projected to more than double this year, rising from 1.5% net growth in 2024 to 3.1%, as declining interest rates and improved consumer confidence drive housing market activity, according to the latest EY ITEM Club Outlook for Financial Services.
However, with house prices still climbing and mortgage rates remaining elevated, lending growth is expected to stabilise in the following years, reaching 3.2% in 2026 and 3.6% in 2027.
The broader UK economy has been recovering more slowly than anticipated, but steady growth is forecast over the next two years. GDP is expected to increase by 1% in 2025 and 1.6% in 2026, supporting a gradual recovery in banking activity. As borrowing costs decline, total UK bank lending is forecast to grow from 2.3% in 2024 to 3.7% in 2025, before reaching 4.1% in 2026 and 4.3% in 2027.
After stagnating in 2023, mortgage lending in the UK picked up in the latter half of 2024, supported by slowing inflation and improving real incomes. This modest recovery led to net mortgage lending growth of 1.5% for the year.
With further rate reductions anticipated in 2025, consumer demand for mortgages is expected to strengthen. The EY ITEM Club predicts that mortgage lending growth will more than double to 3.1% in 2025. However, sustained high property prices and relatively expensive borrowing costs are expected to moderate future growth.
“The UK’s gradual economic recovery is strengthening confidence and translating into more appetite to borrow from UK banks,” said Martina Keane (pictured), EY UK and Ireland financial services leader. “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.”
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