Mortgage arrears falls to lowest level since 2022

New analysis by Pepper Advantage,  on its portfolio of over 100,000 UK residential mortgages has shown that the arrears environment for residential mortgages has continued to improve – albeit slightly – with a 0.8% drop in the arrears rate relative to Quarter 2 (Q2) 2024. However, the arrears rate for Buy-to-Let (BTL) mortgages continued to rise, increasing nearly 10% quarter-on-quarter.

The data also showed that the percentage of mortgages in arrears grew by only 0.1% in Q3 2024. This is the lowest recorded since Q3 2022. For the second quarter in a row, the improvement in the UK’s overall arrears rate was driven by residential mortgages, which saw a decline of 0.8%.

The Q3 arrears rate for Buy-to-Let mortgages grew 9.7% compared to Q2. This follows significant increases in Q2 and Q1. The number of new BTL mortgages dropped 1.6% in Q3 relative to Q2 and 10.6% compared to this time last year.

In the residential market, new originations in the third quarter dropped 7.6% compared to the high seen in Q2 2024 (which grew a substantial 20.9% over Q1), continuing the overall better performance seen in 2024 over 2023. Despite falling originations, the outlook for the final quarter remains strong, with falling interest rates and increased activity in the housing market leading to more demand from buyers.

Direct Debit Rejections (DDRs), a form of missed mortgage payment, typically occurs due to insufficient funds when a direct debit is called and is an early indicator of borrower stress. Despite the general improvement across regions, the latest DDR data shows the macroeconomic environment continues to weigh UK mortgage holders. The percentage of residential mortgages that experienced a direct debit rejection in Q3 2024 grew 1.9% compared to the 0.4% growth seen in Q2. DDRs for Buy-to-Let mortgage holders grew 2.7% compared to Q2.

Aaron Milburn, UK Managing Director for Pepper Advantage, said “Our latest data shows that 2024 has been a year of improvement for the UK mortgage market. The overall arrears rate for residential mortgages appears to have plateaued, with some regions such as the South West recording a pronounced decline in the rate of arrears. Alongside the encouraging arrears data, the number of new originations remains solid, with falling interest rates starting to have an impact.

“Looking to 2025, the data also shows headwinds clearly remain and the signs of structural challenges in the buy-to-let market are cause for concern with a knock-on effect for renters. Private landlords with BTL mortgages continue to exit the market as they grabble with the entrenched higher rate environment and the potential for additional taxes, increasing supply-side pressures and pushing up rental prices. Time will tell whether this divergence develops into a wider trend, but we’ll be following the data closely as we continue to support borrowers through difficult circumstances.”

Analysing arrears by region shows declining rates across large parts of the UK. While overall rates of arrears have declined, the rate of decline varies across regions.

• Greater London: Greater London recorded its lowest growth rate since 2021 – only 0.4%. This compares to a Q2 growth rate of 6.0%.
• South West: The South West region saw a notable decline in the arrears rate, registering a decline of 1.5% during Q3 – the first decline for this region since 2022.
• North East, North West, Scotland, and Yorkshire and Humberside: Rates of arrears dropped in Q3 compared to Q2.
• West Midlands: The West Midlands recorded an arrears growth rate of just 0.1% in Q3.