Report summary:
Q4 2025 data shows that the overall rate of arrears across Pepper Advantage’s UK portfolio dropped for a third consecutive quarter and is now at its lowest rate since Q4 2023. Meanwhile, new originations hit a three-year high and direct debit rejections – a form of missed mortgage payment – held relatively steady over the holiday period.
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.
An analysis of the data across Pepper Advantage’s UK mortgage portfolios shows that the percentage of mortgages in arrears dropped by 1.1% in Q4, marking the third consecutive quarter of improvement. The overall arrears rate has fallen to its lowest level since Q4 2023 (figure 1).
This improvement was seen across both residential and Buy-to-Let (BTL) mortgages, which dropped 0.9% and 10.4%, respectively (figure 2). The improvement in the residential arrears rate in the final quarter compares to a 0.2% drop in Q3 2025 and 4.7% in Q2 2025, representing a slow but steady continuation of a trend seen throughout the year.
The large decline in the BTL arrears rate is due to a portfolio migration that occurred over the course of the quarter, but anecdotal evidence from Pepper Advantage’s arrears team supports an overall conclusion of an improving arrears landscape.
Looking at arrears across product type once again demonstrates Simpson’s paradox, a statistical phenomenon where trends that are apparent within smaller groups disappear or reverse when those groups are combined. The arrears rate across fixed and variable rate mortgages increased in Q4 by 3.4% and 4.6%, respectively (figure 3), though it is important to note that the overall number of variable rate loans in arrears has fallen.
Every region in the UK[1] except London and the South West saw its arrears rate decline in the last quarter of the year. London’s arrears rate rose by 0.6% and the South West’s increased by 2.1% (figure 4):
Analysis of arrears data by age shows that younger mortgage holders saw increased pressure in Q4, with the arrears rate for those aged 21-30 and 31-40 growing from a relatively low base. The arrears rate dropped modestly for those aged 41 and above (figure 5):
The generally positive signs seen in our arrears data are also reflected in our direct debit rejections (DDRs). DDRs are a type of missed payment and serve as a leading indicator of portfolio health, often peaking during the holiday season. While Q1 tends to see a bigger spike than Q4, the 0.7% increase in our DDR rate in the final quarter indicates that UK households entered the Christmas period with a focus on maintaining their finances (figure 6).
This focus on spending aligns with recent data on UK retail sales, which rose in December at their slowest rate since May 2025. According to the Financial Times, “consumers were ‘cautious’ and ‘squeezed by the rising cost of living’”, which resulted in a “drab” Christmas for many UK retailers.
Our data also highlights the UK's moderated inflation rate, with the Consumer Prices Index including owner occupiers' housing costs (CPIH) falling to 3.5% in November 2025, down from 4.1% in August. While customers remain cautious and are closely managing their budgets, the combination of steady DDRs and falling arrears indicates that UK households may be benefiting from lower inflationary pressures. Both datasets could improve further if inflation continues to ease in 2026.
Residential and BTL mortgages both maintained steady DDRs in Q4, up 0.1% and 2.7%, respectively. These figures indicate that the stabilizing environment we saw in Q3 continued into the final quarter of 2025 (figure 7).
It is a similar story with DDR rates for fixed and variable rate mortgages, which increased by a modest 1.2% and 1.6%, respectively (figure 8).
Looking at DDRs by age reveals an equally stable performance, with small deviations across age groups (figure 9).
Pepper Advantage manages organic origination for over 10 UK originators, 80% of which are funded by capital markets. New originations in Q4 2025 grew 1.9% following the 20.2% growth reported in the third quarter. The number of new originations is now higher than it has been since Q4 2022, before interest rates felt the full impact of the September 2022 mini-Budget. The new origination pipeline looks healthy heading into 2026, indicating that demand for new mortgages may be increasing.
As we move into 2026, data from our portfolio, particularly in new originations and falling arrears, suggests a cautious recovery in the UK mortgage market. However, these positive indicators exist against a backdrop of low consumer confidence and ongoing macroeconomic uncertainty, with retail spending remaining subdued as households continue to grapple with high living costs.
While inflation has shown signs of moderation, the risk of sudden spikes persists. Despite the decline in the Consumer Prices Index (CPIH), many consumers continue to face financial pressures that could impact their mortgage payments. The steady performance of Direct Debit Rejections (DDRs) indicates that households are managing budgets and finding ways to cope, with limitations on retail and other discretionary spending.
Looking ahead, the combination of a healthy origination pipeline and improving financial indicators introduces a degree of cautious optimism. Three consecutive quarters of falling arrears represent the strongest signal yet of recovery in our portfolio, although the arrears rate remains significantly higher than it was in 2022. We remain watchful in the face of continued macroeconomic uncertainty, as shifts in inflation, interest rates, and consumer confidence could quickly alter current trends.
The unpredictability of the economic landscape necessitates a careful approach as we navigate the start of 2026.
For more information, please contact us here.
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.
To find out more about Pepper Advantage and our Credit Intelligence platform, click here.
1 Please note Northern Ireland is excluded due to small sample size.
Disclaimer
The material contained in this Article (the “Material”) has been prepared by Pepper Advantage Technologies Limited (“Pepper”).
No representation or warranty, express or implied, is or will be made with respect to the accuracy, completeness, usefulness or merchantability of the Material or its fitness for a particular purpose or regarding the accuracy of the assumptions or the output or the appropriateness of the parameters used in the calculation of any projections or estimates set out herein or the correlation of the data to the actual or expected performance and characteristics of any transaction and no liability or responsibility is or will be accepted by Pepper or any of its affiliates or associated companies or any of their respective directors, officers, employees or agents in relation thereto. Any use of the Material by the Recipient for any purpose whatsoever will be entirely at the Recipient’s own risk.
This Material may utilise information which has not been independently verified and may include that from public sources and third parties (including market and industry data). Further, this Material may contain forward-looking statements, estimates, forecasts and projections that may be affected by inaccurate assumptions, expectations and estimates and by known or unknown risks and uncertainties are predictive in character and inherently speculative and may or may not be achieved or prove to be correct. The Recipient should not place reliance on such statements.
By accepting the Material, the Recipient acknowledges that (a) Pepper is not in the business of providing advice including legal, tax or accounting advice, (b) there may be financial, legal, tax or accounting risks associated with any transaction, (c) it will seek advice from advisors with appropriate expertise to assess relevant risks and independently determine, without reliance upon Pepper, the economic risks and merits of any transaction and that it is able to assume any such risks and that (d) nothing herein shall form the basis of or be relied on in connection with any contract or commitment whatsoever and neither Pepper nor any of its agents accept liability for any loss howsoever arising, whether direct or consequential, from, related to or in connection with any use of the Material or otherwise arising in connection herewith.
Your receipt and use of the Material constitutes notice and acceptance of the foregoing.