UK Mortgage Arrears Rise for First Time Since 2024

Report summary:

Arrears across Pepper Advantage’s UK portfolio in the first quarter grew for the first time since Q4 2024. The arrears rate grew by 2.1% compared to Q4 2025, indicating that elevated interest rates, renewed cost of living pressures, and broader economic uncertainty are weighing on UK homeowners. Pressure was seen across both residential and buy-to-let (BTL) mortgages. New originations, however, grew 5.7%, with demand strengthening progressively throughout the quarter. Direct debit rejections — a form of missed mortgage payment — increased 17.1% over the period.

Total UK arrears grow 2.1% in Q1

Arrears across Pepper Advantage’s UK mortgage portfolios increased 2.1% in Q1, marking the first deterioration in our portfolio since Q4 2024 (figure 1). This is particularly notable given the profile of our portfolio and suggests that the renewal of inflationary pressures seen has had an impact on household financial resilience.

The residential arrears rate increased by 2.0% while the arrears rate for BTL mortgages rose 12.3% (figure 2). The increase in BTL was more pronounced, indicating that combined financial and regulatory pressures are hitting UK landlords as we enter the new year.

The arrears rate for fixed mortgages grew 1.1% in Q1 2026 while the arrears rate for variable rate mortgages remained essentially flat, registering a negligible drop of -0.6% (figure 3). 

In Q1, every UK region¹ saw a quarterly increase in its arrears rate except East Anglia (-0.8%), the North East (-2.7%), and Scotland (-3.0%). The figures range from an increase of 3.1% in both Greater London and the South East to 0.6% in the South West (figure 4). 

Analysis of arrears data by age shows that the arrears rate has grown in the youngest and oldest age groups. Mortgage owners aged 21-30, while a small cohort, saw their arrears rate jump 11.8%, indicating that financial pressure for Gen Z is more acute as we enter 2026. This compares to a growth rate of 0.2% for those aged 51-60 and 3.0% for those older than 61. 

Borrowers aged 31-40 and 41-50 saw their arrears rates decrease by 2.9% and 2.2%, respectively (figure 5).

Missed Payments Jump 17.1%

Direct debit rejections (DDRs), a form of missed mortgage payment and a leading indicator of portfolio health, grew 17.1% in Q1 2026 (figure 6). While an increase in missed payments is typical around the holidays, this is a more dramatic jump than usual driven by a noticeable spike in March.

The March increase is consistent with a broader economic deterioration during the same period. CPIH rose to 3.4% in the twelve months to March 2026, up from 3.2% in February according to the Office for National Statistics. With the conflict in Iran applying upward pressure on energy costs, the conditions that helped contain DDRs through last year 
are becoming less favourable and the data points to the effects of a shifting economic environment. Whether this change continues into Q2 or is confined to March remains to be seen. 

The ratio of missed payments grew or remained steady across every segment of our portfolio in Q1 except BTL, which saw a drop of 12.3%, and across our youngest borrower cohort (figures 7-10). 

The scale and breadth of the March increase in missed payments sets this quarter apart from usual seasonal norms. Q2 DDR data will be the first meaningful test of whether this spike is a temporary reaction to emerging macro pressures or the beginning of a more sustained trend. 

New originations grow steady despite slow start

Pepper Advantage manages organic origination for over 10 UK originators, 80% of which are funded by capital markets. New originations grew 5.7% in Q1, with growth accelerating in February and March following a slow January. The origination pipeline looks steady heading into Q2, underpinned by stable demand. However, this demand is sensitive to the shifting macroeconomic outlook and could deteriorate as the effects of the war in Iran impact our portfolio.

One Very Big If

The 2.1% increase in arrears in Q1 marks the first deterioration in our portfolio since Q4 2024. While the reversal is modest in scale, the timing is significant. 

The March spike in direct debit rejections coincided with a sharp deterioration in the external environment. Iran closed the Strait of Hormuz in early March, pushing Brent crude past $100 per barrel, and CPIH rose to 3.4% in the twelve months to March, up from 3.2% in February. Our data cannot isolate the effect of the conflict from other cost pressures, but the increase in missed payments in the same month as the energy shock is noteworthy. The Bank of England’s response underlines how quickly the outlook has shifted. At its March meeting, the Monetary Policy Committee voted unanimously to hold rates at 3.75%, compared with February’s 5-4 split. 

Notably, our portfolio may be moving ahead of the wider market: UK Finance reports homeowner arrears fell 2% in Q1. The divergence is consistent with our concentration of needs-based borrowers and reinforces the portfolio’s value as a possible early indicator of household stress. 

Our portfolio enters Q2 with the gains of 2025 largely intact but its direction of travel reversed. Our Q2 data will show whether March was an isolated reaction or the start of a sustained repricing of household finances.

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