Mortgage lending to keep falling next year after steep drop in 2023
Gross mortgage lending is expected to continue falling next year after dropping by more than a quarter in 2023, according to banking trade body UK Finance, as borrowers are squeezed by high interest rates and household costs.
The group said that although the main pressures on mortgage affordability “look to be peaking”, challenges would continue to be felt in 2024 before receding more noticeably in 2025.
High interest rates and the cost-of-living crisis have dampened mortgage activity this year, while increasing numbers of homeowners are falling behind on their payments.
UK Finance projected gross lending to fall 28 per cent to £226bn for the full year and then a further five per cent to £215bn in 2024, driven by weak lending for house purchases.
Meanwhile, the number of mortgages in arrears of at least 2.5 per cent is expected to surge 30 per cent for the full year to 105,600 before again rising 22 per cent to 128,800 in 2024.
UK Finance added that more customers are taking out product transfer (PT) deals with their existing lenders, which do not involve affordability tests.
The PT market grew 11 per cent in 2023 to £219bn but is projected to have peaked and fall slightly over the next two years.
“2023 was a challenging year for both prospective and existing mortgage borrowers, facing affordability pressures from higher interest rates and the increased cost-of-living, as well as house prices still at elevated levels relative to income,” James Tatch, head of analytics at UK Finance, said.
“With these pressures unlikely to ease significantly in the short term, we expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025.”
It has become increasingly difficult for first-time buyers to pass mortagage affordability tests since the start of 2022, driving down lending for house purchase in 2023 some 23 per cent to £130bn.
UK Finance said easing cost pressures next year would be offset by high prices and interest rates, resulting in a more modest fall of eight per cent to £120bn.
The external remortgage market has suffered from the same macroeconomic conditions and is projected to fall by 21 per cent in 2023 to £65bn and then nearly eight per cent to £60bn in 2024.
Buy-to-let lending (BTL) has struggled with the same headwinds on top of taxation and regulatory pressures, contributing to a sharper contraction than the residential market.
UK Finance predicted 2025 would see “a gradual recovery in lending activity” as wage growth, softer house prices and interest rate cuts drive an improvement in affordability.
The rise in arrears is expected to slow down over the next two years as the pressure on household finances recedes.
UK Finance predicted a seven per cent rise to 137,800 in 2025, adding that the slowdown would also be helped by banks tightening their lending criteria.
The group noted that unemployment – often the main cause of arrears – is at very low levels.
A rise in mortgage possessions is not expected to match the rate for arrears, with UK Finance calling the estimated 4,400 possessions through 2023 an “incredibly low number by historic comparisons”.
A small increase to 5,100 is expected for 2024, with most cases dating back to before the Covid-19 pandemic.