Mortgage arrears fall for the first time since the pandemic

New data from global credit management provider Pepper Advantage has shown that arrears and direct debit rejections (DRRs) have declined, with the overall arrears rate decreasing by 4.4% and the DRR rate falling by 5.1% with Quarter 2 (Q2) 2025 marking the first quarter since the Covid-19 pandemic in which a decline in both areas has occured.

The reduction in arrears, including both residential and buy-to-let mortgages, was driven by a significant 4.7% decline in the residential mortgage arrears rate, which has tracked declines in Consumer Price Inflation, including housing costs, since 2024. Eased living costs and earlier interest rate reductions together supported Pepper Advantage’s residential mortgage portfolio in Q2.

Notably, arrears rates fell across every UK region for the first time since Q2 2021, indicating a UK-wide easing of financial pressure after years of inflation and rising living costs.

Buy-to-let arrears rate rose by 0.9% following a modest decline in Q1. However, this marks a sharp slowdown compared to H1 2024, when the arrears rate grew by more than 10% in each of the first two quarters. Year-on-year, BTL arrears remain 9.5% higher, underscoring the challenges landlords face as the market changes.

Arrears rates declined in 11 UK regions in Q2 2025 – the first time this has occurred since Q2 2021. The largest improvements were seen in the North West (-7.9%), Wales (-7.7%), and East Midlands (-7.0%), while London (-0.9%) and the South East (-3.1%) posted the smallest declines.

Direct Debit rejections fell by 5.1%, the largest drop since Q1 2021 whilst new originations decreased by 3.2%, reflecting the impact of the March expiration of the stamp duty holiday. New originations peaked in March, then dropped significantly in April before recovering in May and June.

Aaron Milburn, Managing Director, UK, Pepper Advantage, said “The significant drop in residential mortgage arrears, alongside the simultaneous decline across all UK regions, is a promising sign that some household financial pressures may be easing after years of inflation and rising living costs. This marks the most positive quarterly movement we have observed since this report began.

“It is important to remember that any recovery remains fragile. Unexpected economic shocks or hits to household budgets could quickly reverse this improvement. We remain watchful as we enter the second half of the year and are ready to support borrowers in whatever ways they need.”