UK Finance released its Mortgage Market Forecast and said it expects gross lending to rise by 4% to £300bn in 2026.
It expects property transactions to drop by 10,000 on the previous year, down to 1,202,000, a 1% fall.
Lending for house purchase is expected to grow by 2% to £180bn.
New buy-to-let (BTL) lending is forecast to stay at £11bn, with no growth due to extra taxes and regulation.
Remortgaging is expected to rise 10% to £77bn and product transfers by 2% to £261bn.
Arrears are forecast to fall by another 5% to 87,500, while possessions are expected to go up 9% to 9,400.
UK Finance said house purchase lending grew by 22% this year to £176bn, with a spike in activity before the stamp duty increase in April.
It expects growth to slow to 2% next year as mortgage payments remain high compared to income, making affordability more of a challenge.
BTL lending rose 11% in 2025 to £11bn, but is expected to remain flat in 2026.
Property transactions are predicted to edge down from 1.21 million in 2025 to 1.20 million in 2026 and 2027.
UK Finance expects refinancing activity to pick up further as more fixed rate deals come to an end.
Around 1.6 million fixed rate mortgages expired in 2025, with 1.8 million expected to finish in 2026.
External remortgaging grew 17% to £71bn in 2025, and internal product transfers rose 18% to £256bn.
Both are expected to rise next year, with remortgaging at £77bn and product transfers at £261bn.
Arrears dropped this year to 92,100 from 104,800 in 2024 and are expected to fall again in 2026.
Mortgage possessions were up as industry and courts returned to normal after the pandemic, going from 8,600 in 2025 to a forecast 9,400 in 2026.
James Tatch, head of analytics at UK Finance, said: “The mortgage market showed strength in 2025, particularly for house purchases.
“But even with welcome tweaks to lending regulations this year, affordability is now very tight and this is likely to limit borrowing options for potential buyers in 2026.
“There was expected growth in remortgage activity this year, and with more households coming off their fixed rates next year, we expect to see further growth in 2026.”
Tatch added: “Meanwhile, the number of customers in arrears continued to improve as cost and rate pressures eased, and we are now moving towards the historic lows seen in 2022.
“Although the number of possessions rose, they remain very low by pre-pandemic comparisons.
“We do expect a small rise next year, but possessions will remain at low volumes.”
He said: “As always, help is available for customers who are worried about paying their mortgage.
“Speak to your lender as early as possible to explore the tailored support options they have available.”
Mary-Lou Press, president of NAEA Propertymark, said: “As 2025 comes to its conclusion, we have seen steady progress across the year in many areas.
“We have witnessed three base rate cuts, all of which have all helped enhance consumer confidence and influenced more competitive mortgage products from many lenders.
“We have also seen lenders turn their attention to helping first-time buyers with more specialist products, and a similar approach taken regarding later-life lending as well.”
Press added: “As we head into 2026, it will not be without challenges. However, many economists are hoping for further base rate cuts into the new year.
“For many people with fixed-rate mortgages that may be coming to an end soon, it can represent a brilliant opportunity for people to scan the mortgage market and move forwards with a more competitive or suitable deal, and potentially save significant sums of money each month.”
