UK Finance has predicted a 15% fall in mortgage lending in 2023, compared to this year, returning to pre-pandemic levels.

It estimates that gross mortgage lending will be £322bn in 2022 before falling to £275bn in 2023.

The trade association puts this ‘softer mortgage market’ down to the fact that affordability is coming under pressure from inflation and rising interest rates.

It said that cost-of-living pressures and a rising interest rate environment will increase the pressure on new mortgage affordability, ‘which will reduce effective demand for new house purchase mortgages’.

And it estimated that the number of property transactions will fall by 21% next year.

Helen Morrissey, analyst at Hargreaves Lansdown, said: “We are going to see some big shifts in the mortgage market next year as mortgage lending plummets in the face of the cost-of-living crisis.

“However, if we put this into context these figures come off the back of a period of extremely buoyant market activity as buyers rushed to buy bigger properties and take advantage of the stamp duty holiday. What we are seeing is more like a return to pre-pandemic levels.

“However, it is clear the market will face real headwinds as affordability is hit by rising costs making people a bit more hesitant to take that next step on the housing ladder – UK Finance predict property transactions to fall by more than a fifth over the course of the year. People coming off fixed rate deals may also find their repayments on the rise prompting more belt tightening over the coming months.”

Rise in product transfers

Despite a fall in overall lending, UK Finance forecast a rise in product transfers.

These are where a borrower switches to a new deal with their existing lender, instead of remortgaging to a new lender. Product transfers can be useful where the borrower might struggle to be accepted by a new lender, or if they want to move very quickly to secure a good rate.

UK Finance said product transfers could hit an estimated £212 billion next year, compared with an estimated £197 billion in 2022. For context, it estimates remortgage lending next year will be £89bn.

Morrisey added: “People on the hunt for a new deal should still find they can transfer products internally if they can’t get a deal on the open market and while the number of households in arrears is expected to get close to the 100,000 mark, this represents around 1% of outstanding mortgages and so a relatively small proportion historically. The important thing is that anyone having trouble meeting their mortgage payments engages with their lender as soon as possible to get a plan in place.”