"We expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025."
- James Tatch, head of analytics at UK Finance
UK Finance is predicting a further fall in mortgage lending next year, following a 28% drop in gross lending in 2023.
In 2023, higher interest rates and household costs limited access to mortgage credit. Affordability constraints have also dampened external remortgaging activity, although there was growth in the internal product transfer market, where affordability tests are not required. Cost of living and interest rate pressures also pushed more customers into arrears, which were up on the historically low number in 2022, although the total represents only around 1% of total outstanding mortgages in the UK.
UK Finance figures show that residential lending fell by 23% this year, while new buy-to-let purchase lending is down by 53% and external remortgaging fell by 21%.
The outlook for 2024 is one of continuing challenges in the mortgage market; however, the main pressures on affordability look to be peaking now. Whilst it will take some time for the pressure on household finances to recede, UK Finance expects things to begin to look up in 2025.
In 2024, UK Finance forecasts that gross lending will fall by a further 5% to £215 billion, with residential lending and external remortgaging both predicted to contract by 8%. Buy-to-let purchase lending is expected to fall by a further 13% to £7 billion.
Next year, although no significant increase in Bank Rate is expected, the existing pressure on payments will persist, and UK Finance predicts that arrears will rise to 128,800 by the end of 2024. In 2025, arrears are expected to rise more modestly to 137,800 cases, as the pressure on mortgage payments begins to recede.
Possessions are predicted to increase by 16% to 5,100 – this would still see possessions lower than in any year from 2019 all the way back to 1981, when the mortgage market was a little over half its current size.
Although the outlook for next year is for a modest further contraction, the research shows conditions beginning to improve in the following year. By 2025, UK Finance says the combination of wage growth, softer house prices and inflation and interest rates falling back somewhat will see a gradual recovery in lending activity as affordability improves.
James Tatch, head of analytics at UK Finance, said: “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. In the face of these challenges, borrowing for house purchase has been constrained. At the same time most existing customers looking to refinance their loans chose to take a Product Transfer with their current lender, where affordability tests are not required.
"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.
"The challenging environment has also pushed more households into mortgage arrears. However, the rigorous affordability tests in place since 2014 are now working to ensure that the vast majority of customers can still afford their mortgage payments even with the increased pressure on their finances. Although we forecast more customers will encounter arrears next year, we expect numbers to peak well below levels seen previously."
