"In 2025 we are forecasting continued steady growth in both house purchase and remortgage lending as affordability improves further. "
- James Tatch, head of analytics at UK Finance
With rate and cost pressures continuing to ease, the outlook for 2025 is for a gradual improvement in mortgage affordability, feeding into market growth, according to a new forecast from UK Finance.
UK Finance is predicting an 11% rise in gross mortgage lending during 2025, to £260 billion.
It forecasts a 10% rise in residential lending to £148bn and a 30% rise in external remortgaging to £76bn, with internal product transfers to grow by 13%.
However, new buy-to-let purchase lending is expected to drop by 7% to £9bn.
As interest rates tick down, UK Finance expects arrears to continue to fall, dropping by a further 5% next year.
2024 mortgage lending
In 2023 higher interest rates and cost-of-living pressures constrained affordability and drove a significant contraction in mortgage lending. This continued into the early months of 2024 but, from early summer, the effect of real wage growth and falling mortgage offer rates translated into an increase in lending for house purchase.
Throughout 2024, lower inflation, rising real wages and gradual cuts in mortgage offer rates began to ease the affordability constraints which held back the market in 2023. This led to modest annual growth in lending for house purchases, although refinancing markets remained subdued.
Residential house purchase lending in 2024 totalled £135 billion, an increase of 11% compared with 2023. Although the number of purchase loans in the year grew by 4%, activity was still well below the average levels seen in the decade before 2023.
Remortgaging activity was relatively subdued in 2024. This was, in part, due to slightly lower numbers of customers with fixed rate mortgages reaching the end of their deal periods and looking to refinance. However, despite some cuts in offer rates and rising real wages, affordability constraints limited the options for customers looking to refinance on the open market. Remortgaging fell by 10% to £59 billion in 2024, whilst internal product transfer transactions, which are not subject to affordability tests, fell by a more modest 7% to £224 billion.
The number of customers falling behind on their mortgages looks to have peaked early in 2024 before falling back. While the number of properties taken into possession has risen, this is largely due to historic arrears cases now working through the court system and the numbers are very low compared to historic norms.
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. We are however forecasting a slight fall in buy-to-let lending in 2025.
“The prudent underwriting standards in place for the past decade have helped most customers who might have fallen into difficultly. Arrears look to have peaked early in 2024 before falling back, and we expect them to fall again in 2025."
