These factors restricted access to mortgage credit and dampened external remortgaging activity, although growth was noted in internal product transfers.

The report predicts a continued struggle in the mortgage market for 2024. Gross lending is expected to decrease by 5% to £215 billion, with house purchase lending dropping 8% to £120bn.

External remortgaging activity may also fall by 8% to £60bn. Similarly, a decline of 8% is anticipated in internal product transfers, with buy-to-let purchase lending forecasted to fall by 13% to £7bn. Mortgage arrears are set to rise to 128,800 cases by the end of 2024, and possessions are expected to increase by 16% to 5,100.

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.

“In the face of these challenges, borrowing for house purchase has been constrained. At the same time most existing customers looking to refinance their loans chose to take a Product Transfer with their current lender, where affordability tests are not required.

“With these pressures unlikely to ease significantly in the short term, we expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025.”

Mr Tatch continued: “The challenging environment has also pushed more households into mortgage arrears. However, the rigorous affordability tests in place since 2014 are now working to ensure that the vast majority of customers can still afford their mortgage payments even with the increased pressure on their finances.

“Although we forecast more customers will encounter arrears next year, we expect numbers to peak well below levels seen previously.

“As always, any customers who do find themselves in difficulty should speak to their lender at an early stage, as the industry continues to provide help to anyone struggling with a range of tailored support options.”

The report also highlights the significant contraction in buy-to-let lending, impacted by cost and rate pressures, taxation, and regulatory challenges. New buy-to-let house purchase lending dropped by 53% in 2023, and remortgaging by 47%.

Despite the increase in arrears, the forecast suggests they will peak well below previous cycles. This is attributed to stringent affordability tests, low unemployment levels, and tailored lender forbearance options. Mortgage possessions, while on the rise, are expected to remain relatively low compared to historical figures.

Overall, the market outlook for 2024 remains challenging, with gradual improvements anticipated in 2025 as affordability improves due to wage growth, softer house prices, and falling inflation and interest rates.