UK Finance has released its housing and mortgage market forecasts for 2025 and 2026, alongside projections for the remainder of 2024. The outlook for the mortgage market in 2025 is cautiously optimistic, driven by a gradual easing of rate and cost pressures, which should improve affordability and stimulate growth. While mortgage arrears are expected to decline, there remain significant challenges, especially in buy-to-let lending and long-term arrears cases.
Forecast for 2025: Growth Amid Gradual Affordability Improvement
As interest rates continue to tick down, UK Finance forecasts an 11% increase in gross lending in 2025, bringing the total to £260 billion. This includes a 10% rise in house purchase lending, which is expected to reach £148 billion, and a substantial 30% increase in external remortgaging, projected at £76 billion. However, buy-to-let lending is forecast to contract slightly by 7%, to £9 billion, reflecting ongoing challenges in the sector. Internal product transfers are expected to see a 13% increase, reaching £254 billion.
Arrears, which reached a peak earlier in 2024, are also expected to fall by 5%, to 99,000 cases by the end of the year. This is attributed to improved affordability and continued lender forbearance, as well as a stronger economy supporting more households through difficult times.
2024 Review: A Modest Recovery Following 2023 Contractions
The mortgage market showed resilience in 2024, following a tough 2023 characterized by high interest rates and cost-of-living pressures. Affordability constraints from the previous year gradually eased as inflation decreased, real wages increased, and mortgage offer rates began to fall. This led to modest growth in lending for house purchases, which rose by 11% to £135 billion compared to 2023, although it remained below the pre-pandemic average.
Remortgaging activity in 2024 remained subdued, falling by 10% to £59 billion as affordability constraints limited market opportunities. However, internal product transfers, which are not subject to affordability tests, decreased only slightly by 7%, totaling £224 billion. Looking ahead to 2025, UK Finance expects remortgaging activity to grow by 30%, driven by an increase in fixed-rate mortgage expirations, while internal product transfers will grow more modestly by 13%.
Challenges in Buy-to-Let Market
The buy-to-let market, which was severely impacted by cost and rate pressures in 2023, has experienced a modest recovery in 2024, with lending for house purchases by landlords increasing by 13% to £10 billion. However, the outlook for 2025 is less optimistic, as the Autumn Budget introduced a new 2% Stamp Duty surcharge for buy-to-let investors, adding further pressure to a sector already grappling with heightened regulatory and taxation challenges. UK Finance forecasts a 7% decline in buy-to-let lending, predicting £9 billion in 2025.
Arrears: Improvement but Long-Term Cases Remain
Arrears, which rose significantly in 2023 due to affordability constraints, began to stabilize in 2024, with the number of customers in arrears falling back after an early peak in the year. The current forecast suggests that arrears will continue to improve in 2025, with the number of cases falling to 99,000. However, long-term arrears cases, which have been working through the court system, are still expected to drive a modest increase in mortgage possessions. In 2024, mortgage possessions rose by 31% to 6,300, although this remains far below the levels seen during previous cycles. A further 11% increase in possessions is anticipated in 2025, bringing the total to around 7,000 cases.
Outlook for 2025: A Gradual Recovery with Long-Term Risks
James Tatch, Head of Analytics at UK Finance, highlighted that the mortgage market showed greater resilience than initially expected in 2024, with improved affordability contributing to growth. While the industry anticipates continued steady growth in both house purchase and remortgage lending in 2025, Tatch noted that buy-to-let lending is expected to face ongoing challenges, and arrears will remain a key focus.
Tatch also emphasized the importance of customer support, urging anyone facing financial difficulties to contact their lender early to explore available options. With tailored support and ongoing forbearance measures, UK Finance aims to ensure that customers continue to receive assistance, even as the market experiences gradual growth.
In summary, while 2025 is expected to see improvements in the mortgage market with stronger lending for house purchases and remortgaging, there are still significant challenges, particularly in the buy-to-let sector and the management of long-term arrears cases. The outlook for the market remains cautiously optimistic, with continued growth tempered by regulatory and economic constraints.
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