UK mortgage lending is expected to grow more slowly this year than in 2025 – while lending by banks to businesses is set to nearly halve amid global and economic uncertainty, according to an economic forecasting group.
The EY Item Club bank lending forecast said the net increase in the overall value of mortgage lending will slow to 2.5% this year, compared with a 3% rise in 2025, as limited improvements in affordability and borrowing costs quell housing demand.
Dan Cooper, EY UK & Ireland head of banking and capital markets, said: “The outlook for mortgage lending remains one of growth this year at 2.5%, albeit at a slightly slower pace than 2025.
“With strong pay growth and relatively small rises in property prices over the last couple of years, most of the improvements in housing affordability have now passed.
“Mortgage rates are unlikely to fall significantly below current levels and with wage growth slowing, mortgage demand will likely be subdued this year.”
But mortgage lending is expected to pick up in 2027, with 3.3% growth, followed by a 3.5% rise in 2028.
Mr Cooper added: “From 2027 and beyond, improving economic conditions and a strengthening jobs market should lead to rising housing demand.
“With default rates expected to stay low and banks well capitalised, lenders should continue to concentrate on improving the customer experience and innovating product offerings across mortgages and all lending lines.”
Default rates on UK mortgages are expected to edge up but remain low by longer-term standards, as increasing numbers of homeowners on fixed-rate mortgages refinance onto deals with higher rates, the report said.
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Looking at lending to businesses, Mr Cooper said: “While trading conditions are likely to be challenging this year for businesses both big and small, and the banks supporting them, it’s important to recognise that the outlook is still one of growth.
“The pace of growth is set to pick back up from as early as 2027 as the UK economy strengthens, and all signs point to 2026 being a temporary dip, rather than a long-term slowdown.”
Net growth in the value of UK bank lending to businesses is expected to slow to 3.5% this year, nearly halving compared with a 6.9% net rise in 2025, as global and economic headwinds impact business confidence and reduce investment demand.
While falling interest rates helped boost business lending last year to the highest level since the coronavirus pandemic, the current unpredictable trading environment is expected to weigh on investment appetite in 2026, leading to more modest growth, the report said.
The UK economy is expected to grow only marginally this year, as geopolitical uncertainty, tariff disruption, and tightening fiscal policy impact growth levels.
However, should the UK’s economic outlook improve as expected from 2027, net business lending growth will also regain momentum, rising to 4.5% in 2027, and 4.9% in 2028, according to the forecast.
Total bank lending (across mortgages, consumer credit and business borrowing) is forecast to slow from 4.1% net growth in 2025 to 3.1% in 2026.
Bank lending is then expected to pick back up in 2027 and 2028, growing steadily to 3.8% and 4% respectively, as the economy improves and confidence builds.
Martina Keane, EY UK & Ireland financial services leader, said: “While geopolitical and macroeconomic challenges are dampening the outlook for corporate and consumer borrowing, slower growth is expected to be temporary, and an uptick is expected from 2027.
“In today’s inherently unpredictable trading environment, waiting for stability is not an option, and given the brighter horizon ahead, a one-year dip in lending growth shouldn’t deter banks from progressing longer-term strategies.
“Continuing to focus on AI scaling and governance, digital transformation, cyber resilience, and climate conscious growth will be key, and will help ensure firms are well positioned to capitalise on positive momentum as the economy picks up and confidence strengthens.”
