Banks restrict mortgage lending when interest rates rise

UK property: Demand for consumer credit is expected to rise 7.2% this year as the cost of living and inflationary pressures rise. Photo: May James/Reuters

Banks are expected to rein in UK property lending as they grapple with higher interest rates, a riskier economic outlook and volatility in the markets.

UK mortgage lending is forecast to grow 4% this year but slow to just 0.7% in 2023 thanks to rising interest rates and falling real incomes.

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

Demand for consumer credit is expected to rise 7.2% this year as the cost of living and inflationary pressures tighten. However, this high rate is not expected to continue, and as inflation eases and pressure on household real incomes eases, the growth rate is expected to slow to 5.1% in 2023.

This represents a reversal of the pandemic era, when demand fell by more than 10%.

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

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

Watch: How does inflation affect interest rates?

Unlike 2021, when many UK companies focused on paying down pandemic debt, this year has seen a return to borrowing growth, particularly by large companies, the data showed.

But the 2.4% average growth in the eight months to August was low compared to pre-pandemic times, when annual growth averaged 5.2% in 2018 and 2019.

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

Real incomes are also facing the largest annual decline since the 1970s.

“Geopolitics and the deteriorating economic environment are having a significant impact on households and businesses. While interest rates are still fairly low by historical standards, they are the highest they have been in a decade and will continue to rise,” said Anna Anthony, managing partner for UK financial services at EY.

“This will put further strain on already strained finances and will affect demand for most forms of bank lending over the next year as prospective homeowners postpone purchases and businesses pause investment.

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He added: “Affordability is tight and mortgage and commercial lending is likely to slow to a rate similar to that seen after the financial crisis. The main difference now is that with tighter regulations and higher solvency levels, banks are well capitalized and much better placed to support clients during this challenging time.

“Another key difference is that many consumers are entering this period with a financial cushion in the form of savings built up during the pandemic, and companies that entered into government-guaranteed lending programs during COVID-19 continue to be relatively fixed-rate low interest rates have prices.

“All of this means consumers and businesses are better positioned than they were over a decade ago, and banks are better able to support them.”

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Meanwhile, EY said it does not expect to surpass the peaks seen during the financial crisis, as tighter regulation and austerity would help cushion the impact for consumers, while low ones for companies borrowed during the pandemic Interest and fixed rate government guaranteed loan programs will help keep repayments manageable.

Mortgage loan allowances are expected to rise from 0.02% in 2022 to a nine-year high of 0.05% next year. This remains below the 0.08% peak seen in 2009. A decline to 0.04% is forecast for 2024.

Write-down rates for personal loans and credit cards are projected to be 1.9% this year and rise to 2.5% next year – the highest level since 2012, albeit half the 5% peak reached in 2010. A decline in depreciation to 2.2% is forecast for 2024.

Corporate loan loss allowances are expected to reach 0.7% in 2023, nearly double the 0.4% seen last year. But even that would be a far cry from the 1% to 1.5% rates of the early 2010s. In 2024, impairments are expected to fall back to 0.4%.

Watch: Will UK house prices ever fall?

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