UK mortgage lending growth is forecast to slow next year as stretched affordability and weaker real income growth curb housing demand, according to the latest EY ITEM Club Outlook for Financial Services.
After expected net growth of 3.2% in 2025, the report predicts lending will ease to 2.8% in 2026 before recovering to 3.2% in 2027 and 3.4% in 2028 as interest rates fall and household incomes improve.
The report notes that although the UK economy is set to grow faster than previously expected this year, with GDP forecast at 1.5% for 2025, speculation of tighter fiscal policy in the upcoming Autumn Budget and a softer global backdrop are likely to weigh on the sector.
Total UK bank lending across mortgages, business borrowing and consumer credit is forecast to slow from 3.8% net growth this year to 3.3% in 2026 before picking up again in 2027 and 2028 to 3.7% and 3.9% respectively.
Martina Keane, EY UK & Ireland financial services leader, said: “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.”
Business lending is expected to grow by 5.1% this year, its strongest rise since 2020, as falling interest rates reduce financing costs.
Growth is forecast to slow to 4% in 2026 due to likely fiscal tightening in the Budget, before rising to 4.7% in 2027 and 5.1% in 2028 as confidence improves.
Unsecured credit growth is forecast at 5.6% in 2025, easing slightly through 2027 and 2028 as high borrowing costs and pressure on household budgets temper demand.
Default rates are expected to remain low across mortgages, business lending and consumer credit, with only marginal increases over the next three years.
Mortgage write-offs are expected to fall to 0.001% in 2025 before rising modestly as borrowers refinance at higher rates.
Business write-offs are forecast to remain at 0.17%, while consumer defaults rise slightly from 0.9% to 1.0% between 2026 and 2028 as the labour market softens.
Dan Cooper, EY UK & Ireland head of banking and capital markets, said: “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.”
The report also projects slower growth in insurance premium income next year. Non-life premiums are forecast to rise by 3.6% in 2026, down from 4.6% in 2025, as car insurance inflation eases and home insurance premiums continue to fall.
Life insurance premiums are expected to slow from 4.5% in 2025 to 3.0% in 2026 amid tighter household budgets and a softer labour market before rebounding modestly from 2027.
UK assets under management are forecast to rise by just 2% in 2025 after global trade tensions weakened market performance earlier in the year.
However, EY expects stronger growth from 2026 onwards as equity markets stabilise and bond prices gradually recover, with AUM forecast to grow by 4.3% in 2026, 4.6% in 2027 and 4.4% in 2028.
