UK Finance has recently unveiled its comprehensive forecasts for the housing and mortgage market, providing insights into the trajectory expected for 2024 and 2025, along with an in-depth analysis of the performance in 2023. The preceding year, 2023, grappled with challenges stemming from higher interest rates and increased household costs, which collectively acted as limiting factors on the accessibility of mortgage credit. Affordability constraints further contributed to a subdued environment for external remortgaging activity. However, amidst this landscape, there was a notable upswing in the internal product transfer market, where affordability tests are not obligatory.

Despite the hurdles, the cost of living and the pressure exerted by interest rates prompted a discernible shift in customer behavior, with an increase in arrears observed compared to the historically low figures seen in 2022. It is noteworthy that the overall impact of this rise in arrears remains relatively contained, constituting only around one percent of the total outstanding mortgages in the UK. These insights into the nuances of the market dynamics provide a comprehensive overview, offering stakeholders a basis for understanding the intricacies that shaped the mortgage landscape in the recent past and the anticipated trends in the years to come.

Looking ahead to 2024, UK Finance provides a forecast that anticipates ongoing challenges within the mortgage market. The primary concern revolves around affordability, with the report suggesting that the peak of affordability pressures is currently being experienced. Although the resolution of these challenges is expected to be gradual, there is a cautiously optimistic outlook for 2025, with an anticipation that conditions will start to improve. Throughout this period, the combination of prudent lending standards and the widespread implementation of lender forbearance measures is projected to mitigate the number of customers facing difficulties in meeting their mortgage payments.

UK Finance’s projections for 2024 indicate the following trends in the mortgage market:

• Anticipated decrease in gross lending by five percent, reaching £215 billion.
• Expected eight percent decrease in lending for house purchases, totaling £120 billion.
• Projected eight percent decline in external remortgaging activity, reaching £60 billion.
• Anticipated eight percent decrease in internal product transfers, totaling £202 billion.
• Expected further 13 percent decrease in buy-to-let purchase lending, reaching £7 billion.
• Anticipated increase in arrears to 128,800 cases by the end of 2024.
• Projected 16 percent increase in possessions, totaling 5,100—still lower than any year from 2019 back to 1981, reflecting a mortgage market size just over half of its current scale.

James Tatch, Head of Analytics at UK Finance, provides insights into the mortgage landscape, stating that 2023 presented challenges for both potential and existing borrowers. Affordability concerns arose due to higher interest rates, increased living costs, and elevated house prices relative to income. Borrowing for house purchases faced limitations, with existing customers opting for Product Transfers with their current lenders, avoiding affordability tests.

Given these ongoing challenges, lending is expected to remain subdued in 2024. Gradual improvements in affordability may lead to a modest increase in activity levels in 2025. The demanding environment has also contributed to a rise in mortgage arrears, though the stringent affordability tests implemented since 2014 aim to ensure most customers can still manage their mortgage payments despite financial pressures. While the forecast predicts an increase in arrears next year, the expectation is for numbers to peak below historical levels, reflecting the effectiveness of affordability measures.

“As always, any customers who do find themselves in difficulty should speak to their lender at an early stage, as the industry continues to provide help to anyone struggling with a range of tailored support options.”

Market Overview: Contraction Following Post-Lockdown Strength

In the backdrop of ongoing financial constraints on households, 2023 proved to be a challenging year for mortgage customers, as predicted. The elevated cost of living and interest rate hikes since the beginning of 2022 significantly raised the affordability bar for those entering or moving within the housing market. Consequently, lending for house purchases experienced a notable 23% decline in 2023, amounting to £130 billion. Looking ahead to 2024, despite some alleviation in cost pressures, the sustained influence of prices and interest rates is anticipated to result in a more modest 8% fall in house purchase lending to £120 billion.

These factors also restrained activity in the external remortgage market, witnessing a 21% decline in 2023 to £65 billion. However, amid weak new lending volumes, more customers opted for a new Product Transfer (PT) deal with their existing lenders, exempt from affordability tests. The PT market grew by 11% in 2023, reaching £219 billion. For the next year, UK Finance foresees a slight decline in both external remortgaging and PTs, following a peak in maturing two-year fixed-rate deals in 2023.

While the outlook for the coming year suggests a modest contraction, conditions are expected to improve gradually in the subsequent years. By 2025, a combination of wage growth, softer house prices, and a reduction in inflation and interest rates is anticipated to pave the way for a gradual recovery in lending activity as affordability improves.

Buy-to-Let Activity Constrained on Multiple Fronts

Buy-to-let (BTL) lending has faced a multifaceted constraint as cost and rate pressures, coupled with taxation and regulatory challenges, have dampened activity throughout 2023. This cumulative impact resulted in a more pronounced contraction in BTL lending compared to the residential market. New BTL house purchase lending witnessed a substantial 53% decline, while remortgaging experienced a 47% decrease in 2023.

Looking ahead, UK Finance anticipates a moderated contraction in the coming year, but significant challenges persist for BTL investors, especially for smaller-scale landlords who may find it challenging to distribute costs across their portfolios.

Arrears Increase but Set to Peak Well Below Previous Cycles

As projected in our earlier forecasts, the strain on household finances, which accumulated throughout 2022, manifested in a rise in mortgage arrears by the end of that year. This trend persisted through 2023, culminating in an estimated 105,600 cases with arrears exceeding 2.5% of the outstanding mortgage balance by the year’s end—an increase of 30% compared to December 2022.

In the upcoming year, despite the absence of a significant increase in the Bank Rate, the prevailing pressure on payments is anticipated to persist. UK Finance foresees arrears climbing to 128,800 by the close of 2024. Looking further into 2025, a more subdued increase to 137,800 cases is predicted, signaling a gradual easing of pressure on mortgage payments.

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