30 April 2025
Report summary: Q1 2025 data from Pepper Advantage’s UK mortgage portfolio shows that arrears growth has stalled for the first time since the cost-of-living crisis began in Q3 2022. The overall arrears growth rate for the UK was 0.0%, primarily driven by a 0.1% drop in the buy-to-let (BTL) arrears rate. This improvement in the BTL space was also reflected in the direct debit rejection (DDR) rate, which decreased by 7.1% compared to Q4 2024.
The improvement in BTL mortgages was also reflected in the direct debit rejection (DDR) rate, which decreased by 7.1%. In contrast, the residential mortgage DDR rate increased by 4.3%.
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.
BTL arrears growth drops for first time since 2021; residential arrears increase for second consecutive quarter
The percentage of mortgages in arrears across our UK portfolio remained unchanged in Q1 2025 compared to Q4 2024, marking the first quarter without an increase since Q3 2022.
The improvement in the overall arrears rate was driven by a decrease in BTL, which fell by 0.1% quarter-on-quarter. This contrasts with quarterly arrears rate growth of 1.5% in Q4 2024 and 9.7% in Q3 2024. As illustrated in the chart below, BTL arrears have been increasing slightly but steadily since this report began.
Despite this improvement, the arrears rate for buy-to-let (BTL) mortgages in Q1 2025 was 23.4% higher than in Q1 2024, reflecting the challenges UK landlords have faced as interest rates rose. These challenges have prompted some BTL landlords to exit the market – the number of BTL mortgages in our portfolio has declined 4.9% in Q1 2025 compared to the same period a year ago. However, this decrease is less pronounced than in previous quarters, where declines of 8.6% in Q4 2024 and over 10% in both Q3 and Q2 2024 were observed, suggesting that some of the financial pressures on landlords may be starting to ease.
In contrast, the percentage of residential mortgages in arrears increased by 0.3% in Q1 2025, following 2.4% growth in Q4 2024, marking a reversal of the downward trend observed in the second and third quarters of 2024.
As seen in the charts below, this increase in the residential arrears rate correlates with rising consumer price inflation, including housing costs, which reached 3.9% in January 2025 and 3.7% in February 2025 compared to 3.5% in November and December 2024. March inflation came in at a lower 2.6%, and we did see a corresponding drop in the arrears rate relative to February.
Looking at arrears by product type shows that the arrears rate for fixed rate mortgages increased by 4.5% in Q1 2025 compared to Q4 2024, while the arrears rate for variable rate mortgages grew by 1.4% over the same period. Interestingly, despite the increases in the fixed and variable rate mortgage arrears, the overall arrears rate remained the same. This outcome is an example of Simpson’s paradox, a statistical phenomenon where trends that are apparent within individual groups disappear or reverse when those groups are combined.
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.
- East Anglia: -0.5%
- North East: -4.1%
- North West: -0.5%
- Scotland: -2.1%
- Wales: -3.2%
- West Midlands: -0.4%
Those that saw the arrears rate grow are:
- East Midlands: 1.0%
- Greater London: 0.9%
- South East: 1.9%
- South West: 0.5%
- Yorkshire/Humberside: 0.7%
In Q1 2025, all age groups except those aged 31-40 saw modest growth of 0.1 to 0.4 percentage points in their arrears rates. Those aged 31-40 saw the arrears rate fall by 0.1 percentage points.
Direct Debit Rejections Grow in Line with Seasonal Expectations
The total percentage of UK mortgages that experienced a direct debit rejection (DDR) increased by 1.9% in Q1 2025 compared to Q4 2024. This increase can be largely attributed to seasonal factors, as the post-holiday period in January often results in reduced cash flow, leading to a higher incidence of missed payments.
The direct debit rejection rate for residential mortgages increased by 4.3% in the first quarter, driven largely by a spike in January. In contrast, the DDR rate for BTL mortgages declined by 7.1% over the same period. Although BTL DDRs also rose in January, they decreased in February and March, resulting in an overall quarterly improvement. Notably, this marks the second consecutive quarter of improvement in the BTL DDR rate, which correlates with lowering interest rates and stabilising numbers in our buy-to-let portfolio, which saw the number of loans steadily decrease in 2023 and 2024 as landlords exited the market.
The DDR rate in Q1 grew 1.3% across fixed rate mortgages and 4.5% across variable rate mortgages, again driven by marked increases in January.
When analysed by age group, the DDR rate showed more stability, with the percentage of direct debit rejections in Q1 2025 remaining flat or, in the case of those aged 21-30, even decreasing.
New originations rise ahead of Stamp Duty increase
Pepper Advantage manages organic origination for over 10 UK originators, 80% of which are capital markets funded. New originations in the third quarter rose 4.7% in Q1 2025 compared to Q4 2024, driven by a steep increase in March. The number of new originations in March was over 30% higher than in January or February, likely in anticipation of the Stamp Duty increases that began in April. Q2 new originations will be a key data point to see how much the increase in Stamp Duty combined with recent market turmoil is impacting demand.
Market turmoil clouds outlook
Q1 2025 showed a promising start to the year, with arrears growth stalling for the first time since the cost-of-living crisis began driven by improvement in our Buy-to-Let portfolio. New originations also rebounded ahead of April’s Stamp Duty increases.
Despite this start, we remain cautious due to the increase in the arrears rate for residential mortgages, which correlates with inflationary pressures. This picture is further complicated by the uneven impact across regions, with households in the south, typically viewed as more affluent – but in areas with higher livings costs – recording arrears rate growth while northern regions broadly posted declines.
The economic outlook adds to our caution. March’s inflation data fell more than expected to 2.6%, driving calls for the Bank of England to cut the base rate – both welcome news for borrowers. The ongoing trade war, however, could disrupt global supply chains and reignite inflationary pressure on consumers. While a potential decrease in the Central Bank rate may bring relief, rising consumer prices could still exert pressure on mortgage payments. Given the mixed signals in our portfolio and the challenging short- to medium-term outlook, we continue to monitor our data to identify areas where borrowers could be most at risk heading into the second half of the year.
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