All UK regions see broad-based drop in arrears as financial pressures ease
The UK has recorded its first decline in mortgage arrears since the onset of the cost-of-living crisis, according to new figures from credit intelligence firm Pepper Advantage.
The company reported that arrears across its portfolio of more than 100,000 UK residential mortgages fell by 4.4% in the second quarter of 2025. Direct debit rejections also decreased by 5.1% during the same period.
The improvement was largely attributed to a 4.7% reduction in residential mortgage arrears, which has mirrored falling consumer price inflation, including housing costs, since last year. Easing living expenses and previous interest rate cuts also contributed to the positive trend in Pepper Advantage’s residential mortgage portfolio.
For the first time since the second quarter of 2021, all UK regions saw a decrease in arrears rates, suggesting a broad-based reduction in financial strain following several years of inflation and higher living costs.
The Pepper Advantage report also showed that the buy-to-let arrears rate increased by 0.9% after a slight fall in the previous quarter. However, this rise was much slower than in the first half of 2024, when arrears in this segment grew by more than 10% in each of the first two quarters. On an annual basis, buy-to-let arrears remain 9.5% higher, reflecting ongoing challenges for landlords as market conditions evolve.
Regionally, the most significant drops in arrears were seen in the North West (down 7.9%), Wales (down 7.7%), and the East Midlands (down 7.0%). London and the South East experienced smaller decreases, at 0.9% and 3.1% respectively.
The second quarter also saw a 3.2% fall in new mortgage originations, following the end of the stamp duty holiday in March. New lending peaked in March, declined sharply in April, and then rebounded in May and June.
For mortgage brokers, the decline in arrears points to greater borrower stability and potentially reduced immediate risk. However, with the recovery still fragile, brokers are advised to remain vigilant and continue supporting at-risk clients, as any economic shocks could quickly reverse these gains.
“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,” said Aaron Milburn, managing director, UK at Pepper Advantage. “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.”
The Bank of England is expected to cut interest rates by 0.25 percentage points to 4% tomorrow. While the latest data suggests a turning point for mortgage holders, there remains uncertainty over how future rate decisions may affect the market.
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