Press Release: New data shows UK residential mortgage arrears improve for first time since Mini-Budget but stress appears in buy-to-let

• Residential mortgage arrears rate drops 0.6% in Q2; first fall since 2022
  
  
• Buy-to-let arrears increase 10.9%, signalling pressure on landlords
  
  
• New originations recover

London, 30 July 2024 – Pepper Advantage, a global credit intelligence company, today published data on its portfolio of over 100,000 UK residential mortgages that shows the overall rate of mortgage arrears* growth has dropped to only 1.1% in 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.

Key points from the report include:

• 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 Mini-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.

While the overall UK arrears environment showed signs of improvement, growth trends were distinct between Northern and Southern regions.

• North of England, Scotland, and West Midlands: These regions continue to have the highest absolute arrears rates but were also the only regions to see a quarterly decline in arrears. The North East, North West, Scotland, and Yorkshire and Humberside saw their arrears rates drop 2.5%, 0.4%, 8.1% and 0.4%, respectively, while the West Midlands’s rate of arrears remained the same.

• Southern England, East Midlands, and Wales: The South continued to have the lowest levels of absolute arrears but saw the highest rates of arrears growth. The arrears rates for Greater London, the South East, South West, Wales, and East Anglia grew 6.0%, 3.4%, 3.2%, 1.5%, and 1.1%, respectively. The East Midlands saw mild growth of 0.2%.

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.”

Pepper Advantage’s UK Credit Intelligence report is published quarterly. The Q1 2024 report (available here) showed slowing growth in arrears in the first three months of the year.

*Mortgages in arrears are defined as those that are 30+ days delinquent in payment.

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