This year’s Q2 was the first quarter since the COVID pandemic in which both arrears and direct debit rejections (DRRs) declined, according to analysis by Pepper Advantage.

The credit management firm, releasing data on its portfolio of over 100,000 UK residential mortgages, reported falls in the overall arrears rate by 4.4% and the DRR rate by 5.1%.

Pepper Advantage suggested the reduction in UK arrears, including both residential and buy-to-let (BTL) mortgages, was driven by a significant 4.7% decline in the residential mortgage arrears rate, which has been tracking declines in the rate of consumer price inflation including housing costs, since 2024.

Eased living costs and earlier interest rate reductions together supported Pepper Advantage’s residential mortgage portfolio in Q2, the firm added.

Pepper Advantage’s analysis did also highlight a 0.9% rise in the BTL arrears rate, however, this marked a sharp slowdown compared to H1 2024, when the arrears rate grew by more than 10% in each of the first two quarters.

Year-on-year, BTL arrears remain 9.5% higher, which Pepper Advantage suggested is “underscoring the challenges landlords face as the market changes”.

Managing director, UK, at Pepper Advantage, Aaron Milburn, said: “The significant drop in residential mortgage arrears, alongside the simultaneous decline across all UK regions, is a promising sign that some household financial pressures may be easing after years of inflation and rising living costs. This marks the most positive quarterly movement we have observed since this report began.

“It is important to remember that any recovery remains fragile. Unexpected economic shocks or hits to household budgets could quickly reverse this improvement. We remain watchful as we enter the second half of the year and are ready to support borrowers in whatever ways they need.”

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