UK Mortgage Arrears Decline for the First Time Since Cost of Living Crisis

UK mortgage arrears have fallen for the first time since the cost of living crisis began. Q2 2025 data shows a 4.4% decrease in overall arrears rates and a 5.1% drop in direct debit rejections. The decline is attributed to eased living costs and earlier interest rate reductions. However, buy-to-let arrears rates rose by 0.9%, and new originations decreased by 3.2%.

UK mortgage arrears have fallen for the first time since the cost of living crisis began, according to data released by Pepper Advantage. The quarterly report for Q2 2025 shows a 4.4% decrease in overall arrears rates and a 5.1% drop in direct debit rejections. This improvement is attributed to eased living costs and earlier interest rate reductions implemented by the Bank of England [1].

The Bank of England has been proactive in addressing financial pressure on UK households by reducing the base rate from 5.25% to 4.25% between August 2024 and May 2025. These rate cuts have already led to a decline in mortgage rates, with some 2-year fixed-rate mortgages dropping below 4%, providing tangible savings for homeowners [2]. Financial institutions such as Nationwide, Santander, and TSB have adjusted their mortgage rates in response, with TSB estimating annual savings of up to £450 for a standard £200,000 mortgage over 25 years [3].

The reduction in UK arrears, including both residential and buy-to-let mortgages, was driven by a significant 4.7% decline in the residential mortgage arrears rate. This decline has tracked the reduction in Consumer Price Inflation, including housing costs, since 2024. 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 [4].

However, buy-to-let arrears rates rose by 0.9% in Q2 2025, marking a sharp slowdown compared to the first half of 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 [4].

New originations decreased by 3.2% in Q2 2025, 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 [4].

The positive trend in mortgage arrears indicates that some household financial pressures may be easing after years of inflation and rising living costs. However, the recovery remains fragile, and unexpected economic shocks or hits to household budgets could quickly reverse this improvement. Consumers are advised to review their mortgage commitments and debt strategies to navigate this shifting environment effectively [5].

In parallel, the UK government has announced a £450 Cost of Living Payment to be distributed in August 2025, providing additional relief to families grappling with rising living costs [6]. This fiscal support, combined with the rate cuts, demonstrates a coordinated effort to stabilize household budgets and maintain economic confidence amid ongoing uncertainties.

The housing market has also responded positively, with house prices rising by 2.4% recently, partly attributed to the anticipation of lower borrowing costs [7]. As the economic landscape continues to evolve, the Bank of England will need to balance inflation control with growth support. The actions taken so far indicate a commitment to easing financial burdens while maintaining macroeconomic stability, although the full impact of these measures will depend on future economic developments and consumer responses.

References:
[1] https://www.ainvest.com/news/bank-england-cuts-rates-100-bps-ease-mortgage-burdens-support-household-spending-2508/
[2] https://www.forbes.com/uk/advisor/mortgages/2025/08/01/mortgage-updates/
[3] https://www.devonlive.com/news/cost-of-living/nationwide-santander-tsb-cut-mortgage-10390668
[4] https://think.ing.com/articles/bank-of-england-set-to-cut-rates-amid-jobs-market-jitters/
[5] https://mortgagesoup.co.uk/job-cuts-to-inflation-shock-preparing-for-a-mortgage-arrears-crisis/
[6] https://www.msn.com/en-za/news/other/homeowners-urged-to-budget-wisely-amid-interest-rate-cuts-and-debt-concerns/ar-AA1JJNfW?ocid=finance-verthp-feeds
[7] https://www.forbes.com/uk/advisor/personal-finance/2025/08/01/house-prices-updates/