UK Mortgage Report: Arrears Fall for Second Consecutive Quarter

0.3% Drop in Q3 Arrears Rate Follows 4.4% Decline in Q2 while New Originations Rebound 20.2%

Report summary: 

Q3 2025 data shows that the improvement in the total arrears rate across Pepper Advantage’s UK portfolio seen last quarter has continued, with the arrears rate falling 0.3% compared to Q2 2025. This slight improvement was driven by a decline in the residential arrears rate, which fell 0.2% quarter-on-quarter. Direct debit rejections, however, grew 4.2%, in line with rising inflation.

UK arrears fall 0.3% following 4.4% drop last quarter

The percentage of mortgages in arrears across Pepper Advantage’s UK portfolio fell 0.3% in Q3 2025 relative to Q2 2025 (figure 1). This is only the second drop in the arrears rate seen in our portfolio since Q3 2022 and compares to a 4.4% drop in Q2. The second consecutive quarterly improvement in arrears is a welcome sign, but the decelerating rate of change indicates that any improvement in borrowers’ financial position may be temporary.

The continued improvement was once again driven by Pepper Advantage’s residential mortgage portfolio, which saw the arrears rate drop 0.2% in Q3 2025. This figure compares to a 4.7% quarterly decrease in Q2.

The arrears rate in our Buy-to-Let (BTL) portfolio grew slightly at 0.1% compared to a growth rate of 0.9% in Q2 and a drop of 0.1% in Q1 (figure 2).  Three quarters of relative stability in BTL arrears indicates that the recent churn seen in our BTL portfolio may be past its peak, as many landlords who struggled in a higher rate environment have exited the market.

An analysis by product rate type shows an increase in the arrears rate across both fixed (2.4%) and variable (0.4%) rate mortgages (figure 3). The discrepancy between a fall in the overall arrears rate while seeing increases in both fixed and variable rate arrears is another example of Simpson’s paradox, a statistical phenomenon where trends that are apparent within smaller groups disappear or reverse when those groups are combined.

While every region in the UK¹ saw a decrease in its arrears rate in Q2 2025, the picture in Q3 is more mixed, with London, Scotland, the South East, South West, and Wales all seeing modest growth in their arrears rates (figure 4):

• London: 2.8%
• Scotland: 0.5%
• South East: 0.9%
• South West: 1.3%
• Wales: 0.2%

Cutting arrears data by age also reveals a mixed picture, with the arrears rate growing for those aged 31-40 (3.3%) and 41-50 (2.1%). Mortgage holders in our portfolio aged 21-30 saw their arrears rate fall 2.9% while those aged 51-60 and 60+ saw their arrears rate drop by 1.2% (figure 5).

Direct Debit Rejections Rise 4.2%

The unclear outlook seen in our arrears data is also reflected in the quarterly growth rate of direct debit rejections, a type of missed payment that often serves as a leading indicator of portfolio health.

The direct debit rejection rate (DDR) in Q3 2025 grew 4.2% compared to Q2 2025. This number compares to the 5.1% quarterly decline seen in Q2 (figure 6).

This increase, and the decelerating improvement in the arrears rate, correlates with rising inflationary pressures in the UK, with CPIH growing 4.1% in August 2025. Moreover, food and drink inflation is expected to grow to 5.7% by December, which could hit UK household budgets over the holiday season.

An analysis of the direct debit rejection rate for residential and buy-to-let mortgages shows a difference in outlook for homeowners and landlords. Residential DDRs increased by 7.1% in Q3 2025 compared to Q2, whilst BTL DDRs fell by 7.9% – a particularly notable drop following the 8.4% decline seen last quarter (figure 7).

The continued decrease in the percentage of BTL mortgages experiencing a DDR suggests that the positive trends in our BTL portfolio reflect a structural shift in UK landlords’ financial positions. Pepper Advantage saw a larger than usual number of BTL landlords exit the market in 2024, whilst new originations for BTL hit record lows. As stated above, our BTL portfolio is now showing signs of stabilization as many landlords who struggled as interest rates rose have exited the market. New originations in the BTL sector also grew 18.5% compared to Q3 2024.

As with arrears, the DDR rates across both fixed and variable rate mortgages grew. The quarterly DDR growth rate was 4.6% for fixed rate mortgages and 3.7% for variable rate mortgages (figure 8).

Looking at DDRs by age reveals slight growth across all age groups except those aged 51-60, who saw a slight drop. However, changes in the DDR rate when cut by age remain relatively small (figure 9).

New originations rebound 20.2% following Stamp Duty cliff

Pepper Advantage manages organic origination for over 10 UK originators, 80% of which are funded by capital markets.  New originations in Q3 2025 saw dramatic growth of 20.2% compared to Q2 2025, when demand for new originations was hit by the March expiration of the Stamp Duty holiday. The number of new originations was higher than average in all three months of Q3, indicating that overall demand for new mortgages has recovered from its April nadir.

Recovery looks more fragile than lasting 

Q2 2025 was the strongest quarter in terms of arrears and DDR improvement since interest rates rose and the cost-of-living crisis began in 2022. However, as we noted last quarter, the tentative recovery looked fragile, with inflationary pressures, potential tax rises, and overall macroeconomic risk looming large on household finances.

This fragility grew in Q3, as the arrears rate improved a modest 0.3% compared to the 4.4% decrease seen last quarter. More importantly, direct debit rejections are once again up and are likely to grow further in Q4 over the holiday season.

Lastly, relief from future interest rate cuts “hangs in the balance” according to the BBC, with a 3.8% inflation rate well above the Bank of England’s 2% target. Rising food prices are putting renewed pressure on household budgets, particularly those in lower income brackets, and the improvement in borrowers’ financial positions seen last quarter could prove to be short-lived.

The outlook heading into the end of the year is more fragile than it was just three months ago, and we remain vigilant as the need to support customers facing financial strain could grow quickly as we approach the end of the year.

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Why Pepper Advantage?

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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¹ Please note Northern Ireland is excluded due to small sample size.

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