Affordability pressures and income constraints to weigh on housing demand next year
Mortgage lending in the UK is projected to moderate in 2026, with net growth anticipated at 2.8%, following an expected 3.2% increase this year, according to the latest EY ITEM Club Outlook for Financial Services.
The report attributes the slowdown to ongoing affordability challenges and a reduction in real incomes, which are expected to dampen housing demand.
Despite these headwinds, the outlook suggests that lower interest rates and a recovery in real income growth could support a rebound in mortgage activity. Net mortgage growth is forecast to return to 3.2% in 2027 and to surpass current levels by 2028, reaching 3.4%.
The broader banking sector is also predicted to experience a temporary deceleration. Total UK bank lending—including mortgages, business loans, and consumer credit—is forecast to slow from 3.8% net growth this year to 3.3% in 2026.
This trend reflects the impact of a potentially tighter fiscal environment, global economic uncertainty, and weaker income growth, despite the UK economy’s stronger-than-expected performance in 2025, with GDP growth now forecast at 1.5%.
Growth in total bank lending is expected to resume in 2027 and 2028, with net increases of 3.7% and 3.9% respectively, provided that interest rates decline and both consumer and business confidence recover.
“The UK economy made a strong start to 2025, but momentum is slowing and we are facing a challenging market,” said Martina Keane (pictured right), UK and Ireland financial services leader at EY. “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.”
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