UK mortgage lending is hit amid interest rate fears

The UK mortgage market is stuck in the doldrums as high interest rates put off house buyers.

Lending is forecast to grow just 1.5 per cent in 2023 and 2 per cent in 2024 – the smallest increase over a two-year period in a decade, according to data from EY.

It comes as consumers remain spooked by high interest rates and inflation – forcing them to retreat from plans to buy new homes and take on a mortgage.

The forecast for 2023 is the weakest since 2011.

This slowing demand has led to net mortgage lending to average just £300m per month from January to September 2023.

This compares to £5.7billion in same period in 2022, at a time when mortgage approvals were around 40 per cent higher. The housing market boomed during the pandemic when buyers took advantage of a stamp-duty holiday.

And although EY has predicted mortgage demand will pick up through 2025, this is dependent on inflation continuing to fall and interest rate reductions next year.

But the Bank of England squashed hopes last week that such cuts would be around the corner – holding interest rates for the second time in a row.

‘We’ll be watching closely to see if further rate increases are needed,’ Governor Andrew Bailey said. ‘It’s much too early to be thinking about rate cuts.’

His comments underscored tougher language in the Bank’s quarterly monetary policy report, which said that interest rate policy was ‘likely to need to be restrictive for an extended period of time’.

The hawkish message is likely to prove a bitter pill to swallow for millions of mortgage holders and businesses hoping that borrowing costs will ease. If latest market projections are right, there will be no rate cut until well into next year.

This backdrop is also set to worsen as the conflict in the Middle East and the ongoing war in Ukraine continue to create instability in the global economy.

Anna Anthony, partner at EY, said: ‘The UK is still on track to avoid recession this year, but the economic environment remains challenging.

‘Escalating geopolitical tensions around the world are another cause for concern, and it will be prudent for financial institutions to be prepared for further dips in consumer and business confidence.’