Report summary: Pepper Advantage’s Q4 data reveals a mixed picture facing the UK mortgage market, with the rate of arrears for residential mortgages growing 2.4% following two consecutive quarters of decline. Overall arrears growth also increased, up 1.9% in Q4 compared to 0.1% in Q3.
While modest, this growth in the arrears rate reflects a slight increase in the number of borrowers struggling to keep up with their mortgage payments, which may be a sign of underlying economic pressure. However, there was some sign of possible relief in the buy-to-let market, which saw arrears growth slow from 9.7% to 1.5%.
This report is the latest in a series that tracks mortgage data across Pepper Advantage’s UK portfolio of over 100,000 residential mortgages.
It is important to note that our portfolio has a higher composition of borrowers who qualify for needs-based support and are therefore more likely to be acutely impacted by ongoing cost of living pressures than the broader UK mortgage market. Our data reflects this concentration.
The percentage of mortgages in arrears across our entire UK portfolio grew 1.9% in Q4, up from 0.1% in Q3 2024 and 1.1% in Q2.
The percentage of residential mortgages in arrears across our portfolio grew 2.4% in Q4 2024, the first growth rate seen for this group since Q1 2024. Residential arrears fell 0.8% in Q3 and 0.6% in Q2. This return to arrears growth across our residential mortgages is a worrying sign that certain segments of the UK population could be falling under renewed economic pressure, with the consumer price index, including housing costs, rising to 3.5% in both November and December 2024.
The buy-to-let arrears rate also grew in the final quarter of last year, but the growth rate decelerated significantly to 1.5% compared to 9.7% in Q3 2024. However, the overall percentage of BTL mortgages in arrears grew 38.1% compared to Q4 2023. This compares to just 3.9% year-on-year arrears growth for residential mortgages, showing how severely payment pressures hit UK landlords in 2024. This pressure is also reflected in the drop in the number of BTL mortgages across Pepper Advantage’s portfolio, which fell 8.6% compared to Q4 2023 as more landlords exit the market.
Data from the Bank of England suggests that the BTL pressures seen in our portfolio are reflected across the UK, with the share of total mortgage advances for BTL properties decreasing by 1.1 percentage points in Q3 2024 relative to Q2. Falling rental stock has led to corresponding pressure on renters, who saw average rent increase by 9.0% according to the Office of National Statistics (ONS).
An examination of arrears rates across product types reinforces the challenging environment mortgage holders face, with the percentage of mortgages in arrears growing across both fixed and variable rate mortgages. The arrears rate for fixed rate mortgages grew 8.4%, marking the highest growth rate since Q1 2024, when it hit 10.1%. The percentage of variable rate mortgages in arrears across our portfolio grew 2.3% — again the highest growth rate in this group seen since Q1, when the growth rate was 3.9%.
As seen in the chart below, the change in the percentage of fixed rate mortgages in arrears is from a low base and the absolute percentage of fixed rate mortgages in arrears remains small (figure 3).
Broader economic data reinforces the difficult financial scenario many in the UK face. The UK’s GDP growth was 0% in Q3 2024 and the consumer price index rose by 2.6% in November and 2.5% in December, above the Bank of England's target of 2%. Average wages, however, grew from September to November by 5.6% according to the ONS — providing a financial cushion to workers able to secure raises — yet consumer confidence remains low, with the GfK Consumer Confidence Index at -17 in December 2024.
Looking more granularly at regional data shows a deteriorating picture in all areas across the UK except the East Midlands, North East, and Scotland, which saw quarterly arrears drop 1.8%, 2.4% and 3.2%, respectively. All other regions saw their arrears rates grow by between 0.7% and 5.7% percent.
Each age group also saw growth in their arrears rates, which increased by 0.3 and 0.7 percentage points in Q4 2024 compared to growth of 0.2 to 0.6 percentage points in Q3 2024 (table 1).
The total percentage of UK mortgages that experienced a direct debit rejection (DDR)1 in Q4 2024 fell 9.6%, which reflects a large drop in the month of November, particularly across BTL mortgages. The large November drop is likely due to the month end occurring on a weekend.
The percentage of residential mortgages with a DDR decreased 3.1% in Q4 2024 relative to Q3. BTL DDRs declined by 28.6%, which could be partially due to struggling BTL landlords exiting the market, pushing the overall rate of DDRs down in that customer segment.
Fixed rate DDRs fell by 8.2% while the percentage of variable rate mortgages with a DDR decreased by 12.8%, both driven by a drop in November followed by a December increase. It is important to note that fixed rate mortgages continue to have a lower absolute DDR rate than variable.
Looking at DDRs by age shows the same pattern, with a quarterly drop across all groups driven by a good November.
Pepper Advantage manages organic origination for 10 UK originators, 80% of which are capital markets funded. New originations in the third quarter fell 9.2% in Q4 compared to Q3 2024, although this drop reflects a less active market during the holiday season. New originations were steady with this time a year ago.
The outlook for new originations in 2025 remains mixed, with higher interest rates continuing to balance out high demand.
Pepper Advantage’s Q4 data reveals continued challenges for the UK mortgage market, with rising arrears returning to the residential mortgage market following two quarters of decline. Our portfolio suggests that certain segments of the UK population are facing increasing economic difficulties as bond markets exert pressure on real interest rates, particularly in the UK. Rising borrowing costs in January are likely to be felt most acutely by mortgage holders rolling from fixed to variable rate mortgages and could hit demand from first time buyers.
Additionally, inflationary pressures appear to be returning. The Consumer Price Index, including housing costs, has risen above 2% and anecdotal evidence from our UK business indicates more people are managing from month to month compared to earlier in 2024. The savings buffers built during the COVID 19 pandemic have now largely run out and, with energy price caps and other costs increasing, 2025 could prove a return to a more challenging economic environment for many.
While the fall in DDRs is welcome, the data indicates that the weekend month end was the biggest factor in this. The increase in December DDRs as well as early data from January suggests Q1 will be a difficult quarter. The challenges facing certain cohorts of borrowers could grow in 2025 and Pepper Advantage will continue to analyse its data to help those most at risk of falling behind in their mortgage payments. Our analysis of payment trends helps us to identify those most at risk and deploy strategies such as term extensions and temporary interest rate reductions to help keep borrowers in their homes.
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Pepper Advantage is a global credit intelligence company that offers a range of data-led and credit management services via a technology platform that spans Asia, Europe, and the United Kingdom. The company operates in multiple asset classes including residential and commercial mortgages, real estate, SME loans, asset financing and leasing, auto and consumer loans, credit cards, retail finance and BNPL, in addition to offering a number of outsourced operational support services to both financial and non-financial clients. It helps investors, financial institutions, fintechs, and banks manage their credit portfolios, reducing the cost and complexities of systems and supporting new non-bank lending, with a particular focus on clients whose customers are underserved by traditional mainstream lenders.
Pepper Advantage's Credit Intelligence platform transforms real-time global data and analytics into valuable information, so that you can make insight-driven decisions to benefit your business and your customers’ financial experiences.
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