Mortgage lending in the UK is expected to double in growth this year, according to the latest EY ITEM Club Outlook for Financial Services.
In 2024, mortgage lending grew by 1.5%, and it is predicted to rise to 3.1% in 2025 due to falling interest rates and higher consumer confidence.
The growth is then expected to stabilise at 3.2% in 2026.
EY forecasts that the UK economy will continue to recover with GDP rising by 1% in 2025 and 1.6% in 2026.
Martina Keane, financial services leader of EY UK & Ireland, said: “The UK’s gradual economic recovery is strengthening confidence and translating into more appetite to borrow from UK banks.
“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.
Keane added: “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.”
Business borrowing in the UK grew by 2.9% in 2024, largely driven by large firms, while loans to small and medium enterprises decreased as they focused on repaying Covid-19 loans.
The forecast for business borrowing growth is set at 4.5% for this year, with expectations of increased demand due to falling borrowing costs.
However, this forecast has been downgraded from the earlier prediction due to upcoming tax changes and financial conditions.
Further growth of 5.6% in 2026 and 6.0% in 2027 is expected, depending on further interest rate reductions.
Dan Cooper, head of banking and capital markets at EY UK, said: “There is no doubt that the macroeconomic climate of the past few years has been difficult for UK businesses and households, and this has an impact on the banks that support them.
“Looking to the year ahead, the increasingly positive outlook for lending and the prospect of relatively low default rates is welcome news for UK banks and their customers.
Cooper added: “While it’s important to remember that these growth rates are still a way off record-highs of past years, this forecast should provide a boost to banks’ balance sheets and provide some breathing space to focus on executing wider strategic priorities such as transformation and embracing new technologies.”
Growth in consumer credit reached 6.4% in 2024 and is predicted to stay healthy, with forecasts of 5.8% in 2025, 6.8% in 2026, and 5.5% in 2027.
EY foresees write-off rates for mortgages to decline to 0.001% in 2025, before slightly rising to 0.002% by 2026 and 2027.
Corporate loan write-offs are expected to remain stable at 0.17% through 2027, while defaults on consumer loans may increase slightly as real income growth slows.
General insurance premiums are projected to grow by 5.2% in 2025, down from 8.4% in 2024, and life insurance premiums are expected to grow by 4.4% the same year, with further declines anticipated in subsequent years due to slow household disposable income growth.
UK assets under management saw a growth of 4.1% in 2024.
With further interest rate cuts expected, growth is anticipated to reach 4.6% in 2025.
Keane said: “The UK’s financial services sector has proven its resilience time and again in recent years, and now, with economic recovery turning a corner, the industry is looking to the future with optimism.
“While geopolitical uncertainty persists, the UK’s financial services industry remains a leading force on the world stage, and will continue to prioritise support for customers while using this growth opportunity to drive strategic transformation and innovation.”
