Mortgage lending activity dipped at the start of the second quarter but had recovered by June and momentum looks set to have continued into the third quarter, according to the latest figures from UK Finance.
Its Household Finance Review for the second quarter found the initial dip in mortgage lending following Stamp Duty changes was short-lived. The drop was concentrated in April as house purchase transactions were brought forward to Q1 to avoid the Stamp Duty changes.
Smaller declines followed in May but by June a rebound was evident, with annual growth in lending to first-time buyers and movers up 14% and 8% respectively. Forward-looking application data suggests a continued momentum with an uptick in activity into the third quarter of 2025.
Growth below expectations
However, the research found that despite a large number of fixed-rate mortgages maturing this year, refinancing has yet to show sustained growth and remains below expectations, with some customers likely delaying in anticipation of further interest rate cuts. UK Finance expects remortgaging activity to increase over the remainder of the year. This expectation is supported by research from Twenty7Tec which shows that remortgage searches surged in August.
The FCA’s mortgage affordability stress test has helped keep arrears low on mortgages granted since its introduction. However, this has been by restricting access to credit. UK Finance analysis suggests that a modest increase in lending, enabled by lower stress rates, could improve access to mortgages, especially for first-time buyers, without significantly raising arrears.
Stress testing
UK Finance found that rising interest rates since 2022 have been the first meaningful test of the FCA’s 2014 lending rules but despite sharp increases, most borrowers coming off fixed rate mortgages during this period faced rates below the levels they were originally stress-tested against.
The rate a customer pays relative to their original stress test threshold has a notable impact on the likelihood of falling into arrears. Among borrowers now paying above their previous stress test rate, 1.75% are currently in arrears – compared with just 0.21% of those paying below that threshold. The restriction on access to credit means that many potential borrowers have found their ability to secure a mortgage constrained.
The FCA has recently initiated a welcome discussion on whether – and how – these rules might be revised to support higher levels of homeownership. Such changes would involve accepting a greater risk of future arrears.
Modelling based on the 1.75% arrears rate suggests that, if all other factors remained constant, each additional 10,000 mortgages issued at a less stringent stress test rate could lead to approximately 175 additional loans falling into arrears.
To put these figures into perspective: each year, between 600,000 and 700,000 new house purchase mortgages are written, and there are currently around 87,000 homeowner mortgages in arrears.
However, any loosening that significantly boosts demand without a corresponding increase in housing supply would likely drive-up house prices, negatively impacting affordability.
Market resilience
Eric Leenders, managing director of personal finance at UK Finance, says: “After April’s Stamp Duty changes briefly cooled activity, June’s renewed mortgage uptake – and a steady build-up of savings under competitive rates and a stable ISA allowance – demonstrates the market’s resilience as we move into the third quarter.
“The FCA has started a very welcome and important debate on whether mortgage affordability tests can be revised to support higher levels of homeownership. We have already seen lenders make changes to help more people get access to mortgage finance. Our analysis shows that a carefully measured easing of stress-test rules can responsibly allow more people – especially first‐time buyers – into the mortgage market without leading to a significant increase in arrears levels.”
