Mortgage lending is predicted to rise 4% this year following a strong demand in the first-half of the year. This is £63bn in net terms.

However, according to EY Item Club Outlook for Financial Services, this would slow next year as it cited rising mortgage rates and falling real household incomes.

The firm noted that this would rebound in 2024 to 1.4% growth, however.

EY added that impairments on mortgage loans are forecast to rise from 0.02% this year to a nine-year high of 0.05% next year.

This is below the peak of 0.08% in 2009 and is expected to fall to 0.04% in 2024.

The report added that banks will tighten their lending criteria as demand dips along with higher interest rates, riskier economic outlook and volatility in financial markets.

Consumer credit is predicted to grow 7.2% as the cost-of-living crisis and inflationary pressures deepen. Going into 2023, this will slow to 5.1% as inflation lowers and the squeeze on household income eases.

‘Potential homeowners pause purchases’

Anna Anthony, UK financial services managing partner at EY, said: “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.

“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.”

She added that affordability is “stretched” and mortgage and business lending are “likely to slow to a rate similar to that seen post-financial crisis”.

Anthony added that a key difference now was tighter regulation and high solvency levels, so banks are well capitalised and more able at supporting customers.

She explained that Brits had a financial cushion of savings built up during the pandemic and businesses had taken out government-guaranteed loan schemes on fixed rate terms at lower 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,” she concluded.