"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"
- Eric Leenders - UK Finance
Mortgage lending in the UK recovered in June following a dip earlier in Q2 caused by Stamp Duty changes, according to the latest Household Finance Review from UK Finance for Q2 2025. Forward-looking application data suggests momentum is set to continue into the third quarter.
The FCA’s mortgage affordability stress test has helped keep arrears low on mortgages granted since its introduction, but it has also restricted access to credit. UK Finance analysis indicates that modest increases in lending, enabled by lower stress rates, could improve mortgage accessibility, particularly for first-time buyers, without significantly raising arrears.
Household savings balances continued to grow in Q2, with deposits surpassing previous highs as savers took advantage of competitive rates and an unchanged ISA allowance.
Mortgage market trends
Mortgage lending fell in the second quarter as many transactions were brought forward to Q1 to avoid the Stamp Duty changes. The decline was most pronounced in April, followed by smaller drops in May. June saw a rebound, with annual lending growth to first-time buyers and movers up 14% and 8% respectively.
Application data points to likely further activity in Q3. Despite a large number of fixed-rate mortgages maturing this year, refinancing has yet to show sustained growth, as some customers delay in anticipation of further interest rate cuts. Remortgaging activity is expected to rise over the remainder of the year.
Potential impact of changes to lending rules
Rising interest rates since 2022 have tested the FCA’s 2014 lending rules. Most borrowers coming off fixed-rate mortgages faced rates below their original stress-test levels. Borrowers paying above their previous stress-test rate currently have a 1.75% arrears rate, compared with 0.21% for those below the threshold.
This shows the rules have kept arrears low while limiting access to credit, constraining many potential borrowers. The FCA has recently opened a discussion on revising these rules to support higher homeownership levels, accepting some additional risk of arrears.
UK Finance modelling suggests that, if all other factors remain constant, each additional 10,000 mortgages issued at a less stringent stress test rate could result in around 175 additional loans falling into arrears. For context, 600,000–700,000 new house purchase mortgages are written each year, with roughly 87,000 homeowner mortgages currently in arrears.
Any easing of rules that significantly increases demand without a corresponding rise in housing supply could push house prices higher, reducing affordability.
Household savings trends
Household savings continued to grow, with strong inflows into cash ISAs and notice accounts. Since late 2024, instant access accounts have seen some growth, though notice accounts and cash ISAs account for most of the increase in aggregate deposits. At the end of June, households held £295 billion in notice accounts and £205 billion in cash ISAs, 12% and 14% higher than the same month last year.
Eric Leenders, managing director of personal finance at UK Finance, said, “After April’s Stamp Duty changes briefly cooled activity, June’s renewed mortgage uptake, and the steady build-up of savings under competitive rates and a stable ISA allowance, demonstrate the market’s resilience as we move into the third quarter,” he said. “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.”
