Gross mortgage lending is forecast to hit £260bn in 2025, an 11% rise on the £235bn of lending achieved by the market this year, as affordability gradually improves.
Broken down, lending for house purchases is predicted to rise by 10% from £135bn to £148bn, while remortgaging is forecast to rise by 30% from £59bn to £76bn, outpacing the rate of growth of product transfers, which are expected to rise 13% from £224bn to £254bn next year.
An easing of cost pressures and interest rate rises, leading to a gradual improvement in borrower affordability, will feed into greater mortgage market growth next year, according to UK Finance’s lending projections.
Gross mortgage lending in 2024, which is on track to be 4% higher than the £226bn lent in 2023, reflects gradual cuts in mortgage rates, the positive impact of lower inflation and rising real wages, which took effect from early summer, boosting lending for house purchases.
UK Finance said this has led to annual growth for house purchases being up 11% to £135bn between 2023 and 2024. Remortgages dipped by 10%, however, to £59bn year-on-year, while the value of gross product transfer lending fell by 7% to £224bn.
Despite the increase in year-on-year house purchase lending accompanied by a 4% rise in the number of purchase loans, 2024’s projected end-of-year figures are well below the average levels seen in the decade before 2023.
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Remortgaging subdued in 2024
UK Finance said the 10% decrease in remortgage lending expected this year was in part due to the slightly lower numbers of borrowers with a fixed rate up for renewal during the period, and also affordability constraints limiting the opportunities for borrowers to refinance to another lender. Consequently, the value of product transfers that are not subject to affordability tests fell by a more modest 7%.
In 2025, more fixed rates are due to expire, which will drive up remortgage and product transfer lending.
Affordability is expected to become more constrained again in 2026 and house purchase activity is expected to stabilise. The number of fixed rates coming to an end is expected to remain high, which will continue to drive refinancing activity.
Arrears projected to fall
Arrears are projected to fall by 3% this year to 104,200 households compared to 2023, and a further 5% fall is forecast in 2025, to 99,000 – the trade body said this is owing to the reduction in interest rates and tailored forbearance from banks.
The responsible lending regime in operation for the past 10 years, together with low unemployment and extensive lender forbearance, has greatly mitigated the extent of payment problems, said UK Finance, even in the face of the considerable cost and rate pressures of the last three years.
The interest rate stress test that forms part of affordability assessments gave borrowers enough disposable income to cope with the cumulative 515 basis point rise in the Bank of England base rate from the end of 2021 through to August 2023.
Although arrears increased in 2023 as pressures took their toll on some households, the number of borrowers in arrears barely changed in the first half of 2024, before falling back in the second half.
Resilience greater than expected
James Tatch, head of analytics at UK Finance, said: “The mortgage market showed greater-than-previously-expected resilience in 2024 as cost and rate pressures began to recede. Affordability constraints did impact external remortgage activity, but strong competition to retain customers meant those coming off fixed rates could find a new internal product transfer deal without needing a new affordability test.
“In 2025, we are forecasting continued steady growth in both house purchase and remortgage lending as affordability improves further.”
