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UK property: Banks to tighten mortgage lending in 2023 amid rising interest rates

Property: People walk past a branch of Chestertons estate agents
UK property: Demand for consumer credit is expected to rise 7.2% this year, as cost of living and inflationary pressures deepen. Photo: May James/Reuters

Banks are expected to tighten mortgage lending for UK property as they battle higher interest rates, a riskier economic outlook, and volatility in the markets.

The forecast for mortgage lending in Britain is set to grow 4% this year, but slow to just 0.7% in 2023 thanks to rising interest rates and a fall in real income.

According to EY’s Item Club Outlook for financial Services, this will be the lowest level since 2011 in the aftermath of the financial crisis.

Demand for consumer credit is expected to rise 7.2% this year, as cost of living and inflationary pressures deepen. But this high rate is not expected to be sustained, and as inflation falls back and the squeeze on households’ real incomes eases, the growth rate is predicted to slow to 5.1% in 2023.

This represents a reversal of the pandemic period when demand fell more than 10%.

Meanwhile, bank-to-business lending is also forecast to grow 2.2% this year but fall 3.5% in 2023 as appetite and ability for UK businesses to invest is affected by the deteriorating economic outlook and rising interest rates.

This would be the first decline in six years, but less severe than the average annual fall of 7.2% between 2009 and 2012 during and after the financial crisis.

Watch: How does inflation affect interest rates?

In contrast to 2021, when many UK businesses focused on paying back pandemic debt, this year has seen a return to growth in borrowing, particularly by large corporates, the data showed.

But average growth of 2.4% in the eight months to August was low by pre-pandemic standards, where annual growth averaged 5.2% over 2018 and 2019.

It comes as overall housing market activity has remained fairly buoyant this year, in part as buyers looked to lock-in low rate deals, with mortgage lending forecast to to £63bn in net terms.

Real incomes are also set for the biggest annual decline since the 1970s.

“Geopolitics and the worsening economic environment are having a significant impact on households and businesses. While interest rates are still fairly low by historic standards, they are the highest they’ve been in a decade and are set to rise further,” Anna Anthony, UK financial services managing partner at EY, said.

“This will put further pressure on already-strained finances and will have a knock-on effect on demand for most forms of bank lending next year, as potential homeowners postpone purchases and businesses pause investment.

Read more: Heathrow to remove passenger cap from Sunday but warns it could return for Christmas

He added: “Affordability is stretched and mortgage and business lending are likely to slow to a rate similar to that seen post-financial crisis. The key difference now is that tighter regulation and higher solvency levels mean banks are well capitalised and far more able to support customers through this challenging period.

“Another crucial difference is that many consumers are entering this period with a financial cushion in the form of savings built up during the pandemic, and businesses that took out government-guaranteed loan schemes during COVID-19 remain on fixed rate terms at relatively low interest rates.

“This all means that consumers and businesses are better positioned than they were over a decade ago, and the banks better able to support them.”

Read more: UK urged to watch for fraud as people aim to make extra cash in cost of living crisis

Meanwhile, EY said it does not expect levels to exceed the peaks recorded in the financial crisis, as tighter regulation and savings will help cushion the impact for consumers, while for businesses who took on debt during the pandemic, low interest, fixed rate government-guaranteed loan schemes will help keep repayments manageable.

Impairments on mortgage loans are forecast to rise from 0.02% in 2022 to a nine-year high of 0.05% next year. This remains below the peak of 0.08% reached in 2009. In 2024 it is forecast to fall to 0.04%.

Write-off rates on personal loans and credit cards are predicted to be 1.9% this year, rising to 2.5% next – the highest level since 2012, albeit half the 5% peak reached in 2010. In 2024 write-offs are forecast to fall to 2.2%.

Impairments on business loans are forecast to reach 0.7% in 2023, approaching double the previous year’s 0.4%. But again, this would still be a long way short of rates of 1%-1.5% in the early 2010s. In 2024 impairments are forecast to drop back to 0.4%.

Watch: Will UK house prices ever fall?