Report summary:
The arrears rate across Pepper Advantage’s UK portfolio in Q2 2026 declined by 2.5%, reversing a Q1 rise. Direct debit rejections — a form of missed mortgage payment — fell 9.6% in the second quarter, following a 17.1% increase in the first quarter. This improvement in our portfolio is a welcome sign of UK homeowner resilience in the face of renewed economic uncertainty and inflationary pressures.
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 cost of living pressures than the broader UK mortgage market. Our data reflects this concentration.
Pepper Advantage’s UK mortgage arrears rate fell 2.5% in the second quarter, reversing the 2.1% increase in Q1 (figure 1). The Q1 deterioration marked the first setback in the portfolio since 2024 and occurred alongside renewed inflationary pressures in the aftermath of the Iran conflict that began in March. The subsequent Q2 recovery suggests stabilization in arrears performance, though the durability of this improvement warrants further observation.
The residential arrears rate fell by 2.4% in the second quarter, while the arrears rate for BTL mortgages recorded a 0.0% change – a first for this report (figure 2). However, while the BTL mortgage arrears rate did not increase in Q2, this represents a pause rather than relief given the 12.3% increase recorded in Q1. The absence of improvement indicates that BTL landlords continue to face significant headwinds. Combined financial and regulatory pressures persist in weighing on this segment of the portfolio, suggesting that the BTL market remains fragile as it continues to undergo systematic change.
The arrears rate for fixed mortgages grew 2.6% in the second quarter while variable mortgages recorded a 1.2% decline. It is important to stress that the absolute arrears rate for fixed rate mortgages remains markedly lower than that of variable rate mortgages (figure 3).
Every UK region[1] recorded a drop in its arrears rate in Q2 2026, ranging from -5.0% in the North East to -0.7% in the South East (figure 4).
Analysis of arrears data by age shows that the arrears rate has fallen in older cohorts (those aged 41+) while the two youngest age groups saw increases of 4.1% and 3.8%, respectively (figure 5).
The rate of direct debit rejections (DDRs), a form of missed mortgage payment and a leading indicator of portfolio health, dropped 9.6% in the second quarter (figure 6). While DDRs often decline in Q2 following a post-holiday spike, both the 17.1% increase in Q1 and the 9.6% decline in Q2 were more dramatic than historical norms. A noticeable spike in March followed by a sharp drop in April suggests that financial pressure faced by customers were somewhat alleviated in April.
The rate of missed payments in our residential mortgage portfolio dropped 11.1% in Q2, with DDRs across BTL mortgages growing a modest 1.7%. The missed payment rate dropped 9.6% across fixed rate mortgages and 8.0% across variable rate mortgages (figures 7-8).
The late payments trends are consistent with and reflect broader economic indicators. CPIH eased slightly, from 3.4% in March to 3.0% in April and May before dipping to 2.8% in June. Additionally, the energy price cap fell by 7% from 1 April 2026, with the cap set at £1,641 annually for a typical dual-fuel household paying by direct debit. While the Q2 decline is welcome, we continue to monitor this part of our portfolio with caution in light of further pressure on prices, including CPIH increasing to 3.1% in July.
Pepper Advantage manages organic origination for over 10 UK originators, 80% of which are funded by capital markets. New originations declined by 2.8% over the course of the second quarter, driven primarily by a sharp decline in April. Originations subsequently rebounded over the remainder of the quarter, particularly in June, and ultimately finished Q2 only modestly below the level recorded in Q1. Looking ahead, the Q3 pipeline appears to be broadly in line with the overall volumes seen in Q2, with demand remaining relatively steady so far. However, this demand is sensitive to the shifting macroeconomic landscape and could deteriorate if the broader UK economic outlook declines.
The Q2 rebound in our portfolio follows a concerning opening to the year. The Q1 deterioration – the portfolio’s first setback since Q4 2024 – coincided with acute external shocks: energy markets tightened sharply in March, and inflation edged upward as geopolitical tensions mounted.
Q2 presents a different picture. The moderation in inflation, the 7% fall in energy costs from April, and the subsequent decline in direct debit rejections all point to at least a temporary easing of pressure on household finances. The improvement is welcome, but its sustainability remains an open question. July’s uptick in CPIH to 3.1% signals that price pressures have not been fully extinguished as we head into Q3, and the medium-term outlook for borrower finances remains uncertain, with oil prices once again surpassing $100/barrel prior to this report’s publication.
Our portfolio enters Q3 having reversed Q1’s deterioration, which is a welcome development. However, the broader economic backdrop remains unsettled. Inflation, though moderating, has not been fully arrested, and geopolitical tensions continue to create uncertainty around energy costs and broader price stability. We continue to monitor our portfolio closely to assess how different borrower cohorts navigate an increasingly unsettled landscape.
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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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