Demand for home loans is expected to “rebound this year, buoyed by the prospect of falling interest rates,” according to the EY ITEM Club. 

Mortgage lending to forecast to grow 2.2% in 2024, driven by the Bank of England cutting the base rate to 4% by the end of the year from its current 5.25% as inflation eases, says the influential economic unit. 

It adds that “the cost of home loans will also likely decrease.” 

Inflation held steady at 4% in the year to January, as higher gas and electricity charges were offset by falls in the prices of furniture, other household goods and food, according to official data last week. 

The UK also fell into a technical recession last week after gross domestic product fell by a larger-than-expected 0.3% between October and December, after it had already contracted by 0.1% between July and September. 

However, the economic unit says: “Despite entering into a technical recession in 2023, falling inflation and energy prices, alongside expected interest rate cuts, mean UK gross domestic product is expected to rise 0.9% year, with further growth of 1.8% in 2025 and 2% in 2026 predicted.  

“These green shoots of economic recovery are driving the forecast increase in both consumer and business borrowing this year and the next couple of years.” 

It adds that mortgage lending will lift by 3.4% in 2025 and 3.3% in 2026, after home loan growth fell by 0.1% last year. 

EY UK financial services managing partner Anna Anthony says: “This will be another tough year for UK businesses and households, however, there are signs to suggest that momentum in the economy will build following a weak 2023.  

“If borrowing costs and interest rates fall as expected, by next year we expect market confidence to have lifted markedly.  

“There are of course headwinds challenging growth, and with geopolitical tensions rising and a major general election coming up in the UK, potential risks to the downside remain very real.” 

EY UK head of banking and capital markets Dan Cooper points out: “There is no doubt that the economic environment has been extremely difficult for both businesses and households of late.  

“While inflationary pressures are beginning to ease, borrowing costs remain high. Banks must continue to keep a close eye on how customers – particularly those most vulnerable – are managing, and on rising impairments, not least as fixed-rate mortgages roll onto higher rates this year.” 

Around 1.6 million homeowners are expected to refinance their mortgages this year.