UK lending: An insight into current market conditions
With a large number of our clients in the lender market, it’s always helpful to have a steer on the evolving market conditions and economic landscape. While absolute certainty is always elusive, what is clear is that the UK lending market is navigating a complex mix of challenges and opportunities. From shifting interest rates to geopolitical disruptions and changing fiscal policies, there is no denying that the adaptability of lenders, investors, and borrowers is being tested.
Having assessed the perspectives of financial commentators, and drawing from my 30 years of industry experience, here is my analysis of the current economic landscape and its impact on lending for the year ahead.
Interest Rates and Market Dynamics
The Bank of England has taken a notable shift in its approach by reducing the base interest rate to 4.5%, the third cut since August 2024. This move reflects concerns over weaker-than-expected economic growth, with GDP forecasts for 2025 downgraded from 1.5% to approximately 0.75%, according to the Bank of England’s February 2025 Monetary Policy Report. While these reductions are intended to stimulate borrowing and investment, inflation is expected to rise temporarily to 3.7% later in the year, driven by higher energy prices and regulated price changes. This could maintain pressure on lending costs despite lower base rates.
Swap rates, which significantly influence fixed and discounted mortgage rates, remain volatile, as seen in the sharp fluctuations following the UK’s Autumn Budget. The one-year swap rate rose to 4.543%, and the five-year rate climbed to 4.277% in response to increased government borrowing and spending commitments. The effects of the Autumn Budget, combined with global instability, have sustained elevated rates, limiting the potential benefits of base rate reductions. Investors remain cautious due to the government’s £70 billion spending increase and rising public sector net borrowing, which reached £17.4 billion in October 2024. With markets reacting to concerns over fiscal stability, interest rate expectations remain subdued, offering little sign of real relief in the short term.
Affordability Challenges and Regional Disparity
Affordability remains a significant concern, particularly in the residential market. Rising swap rates continue to push mortgage costs higher, adding to affordability issues for first-time buyers. The Financial Times recently reported that the cost of long-term borrowing has reached its highest level since 1988. Compounding these challenges are stagnant wage growth and increased National Insurance contributions. The latest Budget introduced a rise in employer National Insurance contributions to 15% for salaries above £5,000 from April 2025, adding further financial strain on businesses and potentially leading to increased unemployment.
Employment is a critical factor, with Parliamentary statistics citing inactivity levels as high as 21.7%. This, combined with economic stagnation, is making homeownership increasingly out of reach for many, particularly in high-demand regions.
Regionally, the north of England continues to experience growth, albeit with certain areas such as Manchester and Salford becoming unaffordable, prompting buyers to look towards more affordable locations like Bolton and Bury. Meanwhile, London remains steady but slow, with minimal growth anticipated in 2025. However, the prime property market may see a resurgence by 2026.
Market activity is expected to peak in Q1 2025, driven by buyers looking to complete purchases before temporary stamp duty relief measures expire. However, after this surge, market activity may decline due to affordability constraints and missed deadlines.
Investor Sentiment and Development Lending
Specialist lending continues to demonstrate resilience amid economic fluctuations. Property investors, particularly those leveraging existing assets to finance new acquisitions, remain active despite the broader economic challenges. However, development lending faces increasing hurdles, including delays in material supply chains and higher labour costs.
The success of development loans depends on timely project completions and realistic exit strategies. Rising risk levels and heightened costs are pushing developer lenders to pass additional expenses onto borrowers, increasing overall unit costs. House prices experienced a slight dip of 0.2% in December, reflecting broader market uncertainty and a reduced appetite for moving due to financial constraints.
Given the elevated costs and risks, land banking remains a popular strategy among private developers, who acquire land but defer construction until market conditions improve. The government’s target of building 1.5 million homes appears increasingly ambitious, necessitating substantial private sector support to be feasible.
Broader Economic and Geopolitical Influences
The wider economic landscape is shaped by ongoing geopolitical tensions, including conflicts in the Middle East and Eastern Europe. These global events impact inflation, swap rates, and lending conditions, three crucial factors influencing market stability.
Domestically, fiscal policy changes are set to have a lasting impact. The recent increase in employer National Insurance contributions increases operational costs for businesses, potentially leading to higher unemployment and reduced consumer spending. At the same time, the Bank of England’s interest rate cuts aim to stimulate growth, but the anticipated rise in inflation may counteract these benefits, sustaining financial pressure on households and businesses alike.
The UK housing market is a fundamental pillar of the wider economy, making affordability, lending, and stock availability inherent to its stability. While recent interest rate cuts and inflation control measures provide some relief, the market’s recovery will depend on effectively addressing affordability concerns and encouraging private sector development.
In essence, there’s a landscape of cautious optimism for the UK lending market. Stakeholders who proactively adapt to shifting conditions and leverage emerging opportunities will be the ones that thrive. At Westcor, we remain committed to supporting our lenders by focusing on both short-term market movements and long-term strategic planning.
