Spanish bank Santander says UK residential property prices look set to fall 10 per cent this year and will return to 2021 levels.

It’s also anticipating a 1.3 per cent contraction in the wider UK economy this year and warns that some 400,000 of its borrowers are due to come off fixed-rate deals this year: they are set to face an average £313 hike in repayments each month.

The bank also says it’s seen a “marked slowdown” in demand for new loans in recent months.

Santander set aside £321m for mortgage repayment defaults in 2022 and £65m of credit provisions in the fourth quarter. Although residential mortgage arrears remain low so far, it says it saw a small number of business customers defaulting in last year’s final months.

A statement from the bank says: “The outlook remains uncertain as inflation has eroded real disposable income with the prospects of a recession ahead. These challenges for households and businesses are expected to continue into 2023 and could impact credit quality.”

Mike Regnier, chief executive at Santander UK, adds: “The end of 2022 saw a marked slowdown in mortgage lending and, with an uncertain economic outlook for 2023, we will continue to focus on a prudent approach to risk while we help people and businesses prosper.”