While mortgage lending exercise fell in early Q2 following Stamp Duty modifications it had recovered by June, in accordance with UK Finance’s newest Household Finance Review for Q2 2025.
The evaluation additionally pointed to continued momentum into the third quarter with the variety of functions obtained seeing a possible uptick
The FCA’s mortgage affordability stress take a look at has helped preserve arrears low on mortgages granted since its introduction, however has accomplished so by limiting entry to credit score.
UK Finance evaluation suggests {that a} modest improve in lending, enabled by decrease stress charges, might enhance entry to mortgages—particularly for first-time patrons—with out considerably elevating arrears.
Mortgage lending declined within the second quarter of the yr, as many home buy transactions had been introduced ahead to Q1 to keep away from the Stamp Duty modifications.
The dip in mortgage lending in early Q2 was concentrated in April, and after smaller declines in May, June noticed a rebound, with annual development in lending to first-time patrons and movers up 14% and eight% respectively.
Despite numerous fixed-rate mortgages maturing this yr, refinancing has but to point out sustained development and stays beneath expectations, with some clients seemingly delaying in anticipation of additional rate of interest cuts. Nonetheless, UK Finance expects remortgaging exercise to extend over the rest of the yr.
Changes to lending guidelines
The evaluation stated that rising rates of interest since 2022 had been the primary significant take a look at of the FCA’s 2014 lending guidelines. Despite sharp will increase, most debtors coming off mounted fee mortgages throughout this era confronted charges beneath the degrees they had been initially stress-tested in opposition to.
The fee a buyer pays relative to their unique stress take a look at threshold has a notable affect on the probability of falling into arrears. UK Finance information reveals that amongst debtors now paying above their earlier stress take a look at fee, 1.75% are at the moment in arrears—in contrast with simply 0.21 % of these paying beneath that threshold.
UK Finance says this demonstrates that the lending guidelines have generated two key outcomes: they’ve helped preserve arrears low; however have accomplished so by limiting entry to credit score. As a end result, many potential debtors have discovered their means to safe a mortgage constrained.
The evaluation stated it was heartened by the FCA being open to dialogue on whether or not—and the way—these guidelines is perhaps revised to help increased ranges of homeownership. Any modifications would contain accepting a larger danger of future arrears.
Modelling based mostly on the 1.75% arrears fee famous above means that, if all different components remained fixed, every extra 10,000 mortgages issued at a much less stringent stress take a look at fee might result in roughly 175 extra loans falling into arrears.
To put these figures into perspective: annually, between 600,000 and 700,000 new home buy mortgages are written, and there are at the moment round 87,000 home-owner mortgages in arrears.
However, UK Finance suggests any loosening that considerably boosts demand with no corresponding improve in housing provide would seemingly drive-up home costs, negatively impacting affordability.
Commenting on the most recent findings UK Finance managing director of private finance Eric Leenders, stated: “The FCA has began a really welcome and essential debate on whether or not mortgage affordability assessments might be revised to help increased ranges of homeownership. We have already seen lenders make modifications to assist extra individuals get entry to mortgage finance.
“Our evaluation reveals {that a} fastidiously measured easing of stress-test guidelines can responsibly enable extra individuals – particularly first‐time patrons – into the mortgage market with out resulting in a major improve in arrears ranges.”
