UK Financial Sector Resilience Amid Mortgage Lending Shifts: Credit Risk and Equity Valuations in London

The UK financial sector’s resilience in 2025 is being tested by a complex interplay of mortgage lending trends, credit risk dynamics, and global macroeconomic pressures. While mortgage lending activity has surged—driven by falling interest rates and policy reforms—the sector faces mounting challenges from high loan-to-value (LTV) ratios, geopolitical uncertainties, and shifting equity valuations in London. This article dissects how these forces are reshaping the financial landscape and what they mean for investors.

Mortgage Lending Trends: Growth Amid Caution

UK mortgage lending in Q1 2025 saw a 12.8% quarterly increase in gross advances, reaching £77.6 billion—the highest level since Q4 2022 [1]. This growth was fueled by stamp duty reforms and falling mortgage rates, with the Bank of England’s base rate dropping to 4% in 2025 [2]. However, the proportion of new mortgage commitments declined by 1.5% in Q2 2025, signaling cautious lender behavior [3]. Notably, the share of mortgage advances with LTV ratios exceeding 90% rose to 6.7%, the highest since 2008 [1]. While this reflects improved affordability for some borrowers, it also heightens systemic risks, as higher LTV loans are more vulnerable to price corrections.

Credit Risk Dynamics: Resilience vs. Vulnerabilities

The Financial Policy Committee (FPC) has emphasized the UK banking system’s resilience, noting that households and businesses remain well-positioned to weather economic shocks [4]. However, the Financial Stability Report warns of growing vulnerabilities in high LTV and loan-to-income (LTI) lending, which could amplify risks if macroeconomic conditions deteriorate [4]. For instance, the number of new mortgage arrears cases fell by 1.7 percentage points in Q1 2025, but the stock of possessions (repossessions) rose by 7.2% to 7,822—the highest since 2014 [1]. This duality underscores the sector’s fragility: while defaults are currently low, the pipeline of distressed assets is growing.

Global geopolitical tensions and trade policy shifts further complicate the picture. The Financial Stability Report highlights that risky asset valuations remain susceptible to sharp corrections, particularly in sectors reliant on market-based finance [4]. For example, London’s financial institutions faced equity valuation volatility in early 2025 following U.S. trade tariff announcements, which disrupted asset correlations and elevated term premia [5].

Equity Valuations in London: A Mixed Outlook

London’s financial sector equity valuations are indirectly influenced by mortgage market dynamics. EY forecasts UK mortgage lending growth to double from 1.5% in 2024 to 3.1% in 2025, driven by falling rates and rising consumer confidence [2]. This growth is expected to benefit sectors tied to housing, such as housebuilding and construction, which Morningstar Investment Management describes as “undervalued” in 2025 [6]. However, the interplay of global trade uncertainties and domestic affordability challenges creates a tug-of-war for equity valuations.

For instance, while outer London saw a 1.16% price increase in Q2 2025, central London lagged below 1%, reflecting regional disparities in housing demand [7]. Additionally, first-time buyers (FTBs) remain constrained by high deposits and limited supply, with FTB lending accounting for 31.4% of house purchase advances in Q1 2025—the highest since 2007 [1]. These factors suggest that equity valuations for real estate-linked firms may remain volatile unless affordability improves further.

Sector-Specific Vulnerabilities and Policy Responses

The FPC has tightened its focus on high LTI lending, with the proportion of such loans rising in recent quarters [4]. This has prompted regulatory scrutiny, particularly as the FPC reviews its LTI flow limit to ensure lending standards remain prudent [4]. Meanwhile, the government’s “Leeds Reform” and FCA mortgage simplification rules aim to boost affordability for FTBs, but lenders remain cautious about high LTV lending due to concerns over price volatility [7].

For London’s financial sector, these policy interventions create both opportunities and risks. While relaxed lending rules could stimulate demand, they also expose institutions to potential defaults if housing markets correct. The Credit Conditions Survey reveals a net percentage balance of 23.2 for secured credit availability in Q2 2025, indicating lenders are willing to extend credit to low-equity borrowers [8]. However, tightening credit scoring criteria (net balance of 3.4) suggests a balancing act between growth and risk management [8].

Conclusion: Navigating the New Normal

The UK financial sector’s resilience in 2025 hinges on its ability to navigate a dual challenge: capitalizing on mortgage market growth while mitigating risks from high LTV/LTI lending and global uncertainties. While the FPC’s confidence in the banking system’s strength is well-founded, investors must remain vigilant about sector-specific vulnerabilities. For London equities, the path forward depends on whether affordability improvements outpace geopolitical headwinds—and whether lenders can maintain the delicate balance between supporting housing demand and preserving credit quality.

Source:
[1] Mortgage lending statistics - June 2025, [https://www.fca.org.uk/data/mortgage-lending-statistics]
[2] Growth in UK mortgage lending to double this year, [https://www.ey.com/en_uk/newsroom/2025/02/growth-in-uk-mortgage-lending-to-double-over-2025]
[3] Mortgage Lenders and Administrators Statistics - 2025 Q1, [https://www.bankofengland.co.uk/statistics/mortgage-lenders-and-administrators/2025/2025-q1]
[4] Financial Stability Report - July 2025, [https://www.bankofengland.co.uk/financial-stability-report/2025/july-2025]
[5] Fiscal risks and sustainability – July 2025, [https://obr.uk/frs/fiscal-risks-and-sustainability-july-2025/]
[6] What to Expect From the UK Stock Market in 2025, [https://global.morningstar.com/en-gb/stocks/what-expect-uk-stock-market-2025-2]
[7] UK housing tracker outlook - Q2 2025, [https://www.rsmuk.com/insights/advisory/uk-housing-tracker-outlook]
[8] Credit Conditions Survey - 2025 Q2, [https://www.bankofengland.co.uk/credit-conditions-survey/2025/2025-q2]