Mortgage arrears improve for first time since mini-Budget 

New data from Pepper Advantage, has shown that the overall rate of mortgage arrears growth has dropped to only 1.1% in Quarter 2 (Q2) 2024. This marks the third consecutive quarterly decrease in the arrears growth rate across the company’s UK portfolio, which fell from 5.7% in Q4 2023 to 3.9% in Q1 2024.

The arrears rate for residential mortgages fell 0.6% compared to Q1 2024. This is the first drop in residential mortgage arrears since Q3 2022, when the UK’s ,ini-Budget shocked markets.

Buy-to-let (BTL) mortgages saw 10.9% quarterly growth in the arrears rate, suggesting landlords are struggling as fixed rate BTL mortgages expire and are refinanced onto higher rates.

BTL borrowers’ average loan size is 164% greater than that of the average residential borrower, exposing landlords to more significant monthly payment increases when they move to higher interest rates.

New originations increased 20.9% over Q1 2024 and 53.5% over the second quarter of 2023, hitting the highest level since Q4 2022.

Arrears trends were reflected in Direct Debit Rejections (DDRs), a form of missed mortgage payment that typically occurs due to insufficient funds when a direct debit is called, an early indicator of borrower stress. The overall DDR rate for the UK showed a modest increase of 0.4% compared to Q1 2024.

The increase was driven by stress in the BTL market. BTL mortgages saw a 31.3% quarterly jump in DDR rates compared to an increase of just 4.6% in Q1 2024. This compares to a 7.3% drop in the DDR rate for residential mortgages.

Aaron Milburn, UK Managing Director for Pepper Advantage, said “So far this year, every quarter has shown gentle improvement in the mortgage market. Arrears rates for residential mortgages may have plateaued and new originations are climbing, despite persistently high interest rates. Data from the past three quarters suggests certain segments of the market are recovering while others lag behind.

“The buy-to-let market often attracts criticism but is a crucial part of the housing market that requires stable supply and demand. The uptick in BTL arrears reflects growing structural issues within the rental market as landlords struggle to keep up with higher costs – presenting potential risks not only to landlords’ finances but also rented housing supply more broadly.

“Overall, our latest data is cause for cautious optimism as the market appears to be turning a corner, but key segments such as BTL require attention given remaining pressures.”