Overall growth in UK bank lending to households and businesses is set to slow to a three-year low in 2027, as greater caution and economic pressures weaken borrowing demand, according to a forecast.

The EY UK Bank Lending Outlook predicts a marked slowdown in growth in total bank lending, from 3.6% in 2025 to 2.9% this year, and then reaching a three-year low of 2.2% in 2027, before edging up to 2.4% in 2028.

The outlook highlighted tensions in the Middle East, with higher energy costs and weaker economic activity weighing on borrowing demand.

Mortgage lending remains comparatively resilient, according to EY, with growth expected to rise marginally from 3.0% in 2025 to 3.3% in 2026.

But rising unemployment, slower income growth and interest rates remaining higher for longer are then forecast to reduce growth to 2.2% in both 2027 and 2028.

Dan Cooper, EY UK and Ireland head of banking and capital markets, said: “Mortgage lending is expected to prove more resilient than other forms of borrowing this year – despite the challenging economic environment.

“Household incomes have risen faster than house prices in recent years, which has supported buyer affordability, and interest rate cuts in 2025 are still feeding through, leading to a short-term boost in growth.

“However, this is unlikely to continue for much longer. Rising unemployment and slower income growth are expected to weigh on housing demand over the coming years, resulting in slower, albeit still positive mortgage lending growth.”

He added: “Business investment, housing activity and consumer borrowing are all anticipated to remain subdued in the near term.

“Importantly though, write-off rates are expected to remain low and stable across all categories, suggesting slower demand rather than a deterioration in credit quality.

“The UK’s banks enter this period from a position of strength, having built robust capital positions, greater resilience, and disciplined risk management.

“This means they are well-placed to support customers while continuing to invest for the future, so they are ready to meet demand as the economy stabilises and borrowing appetite returns.”

Mortgage write-off rates have risen steadily since 2022 as households have moved from lower-rate fixed deals to higher monthly repayments, EY said.

With much of this refinancing adjustment complete, write-off rates are forecast to increase only marginally, from 0.008% in 2025 to 0.010% in 2026 and 0.011% in 2027, before easing to 0.010% in 2028, remaining low by historical standards.

Meanwhile, consumer credit growth is forecast to fall from 3.4% in 2025 to 1.9% this year and 0.4% in 2027, as banks exercise greater caution amid affordability pressures.

Rising unemployment and slower income growth are expected to make households more cautious about taking on debt, while lenders are also likely to become more selective, EY said.

Consumer credit growth is forecast to increase to 0.7% in 2028.

Meanwhile, corporate borrowing is likely to be particularly impacted, with the rate of growth in lending expected to more than halve this year – from 5.3% in 2025 to 2.1% – as firms take a more cautious approach to investment, according to the forecast.

However, renewed spending on strategic projects should support an uplift from next year, with the forecast rising to 2.8% in 2027 and 3.9% in 2028, EY predicts.

Corporate borrowing has remained subdued since its historical peak in 2008, reflecting a long-term shift in the lending market since the global financial crisis, EY said.

And despite a significant slowdown this year, the central forecast predicts an average growth rate of 2% to 4% over the next five years, which is above the average over the previous decade (2015-2025), as a continued business investment appetite keeps credit demand healthy.

Corporate write-off rates are also expected to remain at low levels, and are forecast to fall from 0.18% in 2025 to 0.17% in 2026, 0.16% in 2027 and 0.14% in 2028.

Martina Keane, EY UK and Ireland financial services leader, said: “Ongoing geopolitical tensions continue to create uncertainty for businesses in the UK.

“While the bank lending forecast reflects the impact of global economic challenges, it is important to keep this in perspective, with growth still set to continue across all major categories.

“The UK banking sector remains resilient and well-positioned to navigate this period of slower activity and banking leaders should remain focused on the longer-term picture, while being ready to adapt quickly should conditions change.

“At the same time, prolonged economic uncertainty means changing customer needs – households may look for greater financial flexibility, while businesses often take a more targeted approach to investment.

“As banks support customers through these near-term pressures, those who continue to invest in AI, emerging technology and broader transformation programmes to tailor their services will be best positioned to capitalise on future opportunities as the economy strengthens.”