Mortgage demand will hit a 12-year low this year as high interest rates pummel borrowers.
UK mortgage lending will grow by just 0.4pc in 2023, the slowest rate since 2011, according to economic forecaster the EY Item Club.
Anna Anthony, UK financial services managing partner at EY warned that an increasing number of borrowers could default.
She said: “Banks also face the prospect of the number of loan defaults rising amid the economic downturn.
“Stretched affordability will affect loan demand across all fronts and banks should be preparing for low and, in some cases, negative lending growth rates.”
But the outlook is better than during the financial crisis. Default rates will be lower and banks have higher capitalisation, meaning they will be better prepared to deal with the increase, Ms Anthony said.
The EY Item Club forecast that impairments on mortgages will rise five times over, surging from 0.01pc of loans in 2022 to 0.05pc in 2023 and 0.04pc in 2024.
Tighter mortgage regulations introduced during the financial crisis mean this jump should be lower than during past recessions. Back in 2009, the mortgage impairment rate hit 0.08pc.
Consumer credit write-offs will hit 2.7pc this year, the highest rate since 2011 and a jump from 1.7pc in 2022. But again, this rate will still be significantly below the 5pc rate recorded in 2010.
Write-off rates on business loans will hit 0.8pc in 2023 – more than double the 0.3pc rate recorded in 2022, but still below the 1.5pc rate recorded after the financial crisis.
Dan Cooper, UK head of banking and capital markets at EY, said: “With more than 70pc of corporate bank loans on variable rates, UK businesses are likely to be affected in the short term by increases in interest rates.”
“Small and medium sized businesses will be most vulnerable,” he added.
Bank to business lending is forecast to see a net contraction of 3.8pc this year – one of the sharpest falls in a decade – as the deteriorating economic environment and rising borrowing costs hammer demand.
Business lending will grow by only 0.9pc in 2024 as small businesses continue to grapple with recent economic shocks.
“Banks are undoubtedly in for a difficult period, particularly in the first half of this year,” Mr Cooper said.