But increase in BTL arrears shows growing structural issues within the rental market
The overall rate of mortgage arrears growth has dropped to only 1.1% in the second quarter of the year, new report from global credit intelligence company Pepper Advantage has indicated.
The decline marks the third consecutive quarterly decrease in the arrears growth rate across the company’s UK portfolio, which fell from 5.7% in Q4 2023 to 3.9% in Q1 2024.
The arrears rate for residential mortgages dipped by 0.6% compared to Q1 2024 – marking the first decrease in residential mortgage arrears since Q3 2022, following the mini budget. However, buy-to-let mortgages experienced a 10.9% quarterly increase in arrears, indicating that landlords are facing challenges as fixed rate BTL mortgages expire and are refinanced at higher rates.
The average loan size for BTL borrowers is 164% greater than that of residential borrowers, leading to more significant monthly payment increases with higher interest rates. Additionally, new originations rose by 20.9% from Q1 2024, and by 53.5% from Q2 2023, reaching the highest level since Q4 2022.
Regional disparities in arrears trends were notable. Northern regions, including the North of England, Scotland, and West Midlands, had the highest absolute arrears rates but saw declines in arrears.
The North East, North West, Scotland, and Yorkshire and Humberside saw arrears rates drop by 2.5%, 0.4%, 8.1%, and 0.4%, respectively, while the West Midlands’ rate remained unchanged.
Southern regions, including Greater London, the South East, South West, Wales, and East Anglia, continued to have the lowest arrears levels but the highest arrears growth rates. Arrears rates grew by 6%, 3.4%, 3.2%, 1.5%, and 1.1%, respectively. The East Midlands saw mild growth of 0.2%.
Pepper Advantage said direct debit rejections (DDRs), an early indicator of borrower stress, reflected these trends. The overall DDR rate in the UK increased by 0.4% compared to Q1 2024. The increase was primarily driven by the BTL market, which saw a 31.3% quarterly rise in DDR rates, compared to a 4.6% increase in Q1 2024. The DDR rate for residential mortgages dropped by 7.3%.
“So far this year, every quarter has shown gentle improvement in the mortgage market,” said Aaron Milburn (pictured), UK managing director for Pepper Advantage. “Arrears rates for residential mortgages may have plateaued and new originations are climbing, despite persistently high interest rates. Data from the past three quarters suggests certain segments of the market are recovering while others lag behind.
“The buy-to-let market often attracts criticism but is a crucial part of the housing market that requires stable supply and demand. The uptick in BTL arrears reflects growing structural issues within the rental market as landlords struggle to keep up with higher costs – presenting potential risks not only to landlords’ finances but also rented housing supply more broadly.
“Overall, our latest data is cause for cautious optimism as the market appears to be turning a corner, but key segments such as BTL require attention given remaining pressures.”
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
