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Mortgage lending is set to slump next year, as the number of arrears and repossessions increases, according to a trade association representing the UK banking and finance industry.

The outlook for 2024 is one of continuing challenges in the mortgage market, but the main pressures on affordability look to be peaking now, UK Finance said.

It added that, while it will take some time for the pressure on household finances to recede, it expects the situation to improve in 2025.

Mitigating factors mean that, whilst arrears are increasing, numbers will peak well below levels seen in previous cycles

UK Finance

Giving its predictions for next year, UK Finance said it expects lending for house purchases to fall to £120 billion next year, from £130 billion in 2023.

External remortgaging activity is expected to fall to £60 billion, from £65 billion this year.

The value of internal product transfers is also predicted to fall, from £219 billion this year to £202 billion in 2024.

The report said: “A number of factors are minimising the extent of payment problems and ensuring that over 99% of the 10.8 million mortgages in the UK are not now in arrears.

“Firstly, the affordability tests for all new lending since 2014 ensure that customers can afford their mortgage payments, even at a higher (stressed) interest rate.

“Secondly, unemployment – historically the main cause of mortgage arrears – is at very low levels. And where customers are struggling with their mortgage payments, lenders have a range of tailored forbearance options which they can deploy on a case-by-case basis to best help borrowers’ individual circumstances.

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“These mitigating factors mean that, whilst arrears are increasing, numbers will peak well below levels seen in previous cycles.”

Mortgage arrears are forecast to rise from 105,600 cases by the end of 2023 with arrears of over 2.5% of the outstanding balance, to 128,800 by the end of 2024.

With a continuing favourable labour market, extensive lender forbearance and gradually improving affordability, the vast majority of customers now falling behind will eventually recover their positions

UK Finance

There were an estimated 4,400 repossessions through 2023, which UK Finance said is “an incredibly low number by historic comparisons”.

Next year, it expects to see a small increase to around 5,100, with this activity still relating to historic cases, most of which pre-date the coronavirus pandemic.

The report said: “With a continuing favourable labour market, extensive lender forbearance and gradually improving affordability, the vast majority of customers now falling behind will eventually recover their positions. The very small minority of cases where this is not possible will not feed through into any material increase in possessions over our forecast period.”

James Tatch, head of analytics at UK Finance, said: “2023 was a challenging year for both prospective and existing mortgage borrowers, facing affordability pressures from higher interest rates and the increased cost of living, as well as house prices still at elevated levels relative to income.

With these pressures unlikely to ease significantly in the short-term, we expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025

James Tatch, UK Finance

“In the face of these challenges, borrowing for house purchase has been constrained. At the same time, most existing customers looking to refinance their loans chose to take a product transfer with their current lender, where affordability tests are not required.

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“With these pressures unlikely to ease significantly in the short-term, we expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025.

“The challenging environment has also pushed more households into mortgage arrears. However, the rigorous affordability tests in place since 2014 are now working to ensure that the vast majority of customers can still afford their mortgage payments even with the increased pressure on their finances.

“Although we forecast more customers will encounter arrears next year, we expect numbers to peak well below levels seen previously.

“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.”

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