UK lending for house purchases will fall by 8% in 2024, a trade association representing banks is predicting.
In a report, UK Finance said higher interest rates and household costs would make it harder for people to access mortgage credit, which is based on affordability.
It predicted this trend would also lead to falls across all lending next year and a higher number of repossessions.
However, the outlook for lending is expected to be brighter for 2025.
UK Finance said it expected lending for house purchases in the UK would fall from £130bn in 2023 to £120bn next year.
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.
“Most existing customers looking to refinance their loans chose to take a product transfer with their current lender, where affordability tests are not required.”
These challenges led to some homeowners finding themselves behind in their mortgage payments, accruing arrears.
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.
The Bank of England will announce its final interest rate decision of the year on Thursday. In November, it held interest rates at 5.25% for the second time in a row and financial markets are hoping that rates have reached their peak and could start falling.
But the Bank’s governor, Andrew Bailey, has warned repeatedly that it is too early to be thinking about rate cuts.
UK Finance said there had been an estimated 4,400 repossessions in 2023, which it said was “an incredibly low number by historic comparisons”.
It pointed out that over 99% of the 10.8 million mortgages in the UK are not now in arrears, due to strict affordability tests and low unemployment.
Historically, the main cause of mortgage arrears has been unemployment, which is currently at low levels.
The unemployment rate was 4.2% between July and September, according to the Office for National Statistics, with the latest figures due to be published on Tuesday.
Higher bills also took their toll on the re-mortgaging market in 2023, with less homeowners able to meet the affordability requirements.
UK Finance was more upbeat about 2025, saying that whilst it would take some time for the pressure on household finances to fade, it expected to see a turnaround.
According to Sarah Thompson, managing director of financial services at Mortgage Scout, an online mortgage broker and advisor, the mortgage market has become more adept at dealing with customers who are facing financial difficulties, particularly since the pandemic.
Ms Thompson said that despite 2024 looking like it will be a challenging year, households are very good at adapting to a new lending landscape and “battening down the hatches”.