UK Finance’s Household Finance Review covering Q1 showed that 84% of these transactions were internal product transfers.
While previous reports suggested product transfers were preferred due to affordability pressures, UK Finance said it was unclear what influenced borrower decisions, but as refinancing transactions were typically shorter than house purchases, this could be an early indication of the impact of the Middle East conflict.
Product transfer completions rose modestly in March, and UK Finance said this was a sign of higher rates feeding through into remortgage pricing and affordability. It expects to see a rise in rates for both product transfers and external remortgages in Q2, but said refinancing borrowers were still resilient to affordability pressures.
The average new remortgage customer in Q1 needed to use 18.1% of their gross income to cover repayments, compared to 21.4% for house purchase customers.
Still, the rate shock for people refinancing is expected to peak this year, particularly for those on five-year fixed rates who took out a mortgage when rates were historically low.
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Despite this, its data shows that 94% of borrowers refinancing this year would be able to get a rate lower than what their mortgage was stress-tested at.
Q1 paints an unclear picture
UK Finance said that, as housing market activity was brought forward to Q1 to avoid the higher stamp duty threshold last year, this year’s figures would inevitably be lower.
Further, its internal data showed activity for April, and potentially May, was higher compared to last year’s “artificially low” figures.
Overall, the provisional assessment suggests the value of lending for the year to May is around 7% lower than last year.
It said that as the market moves through Q2 and the “distorting effects” of last year’s stamp duty changes fade, it would have a clearer picture of the impact of the Iran conflict on mortgage demand.
Considering the known effects on the economy so far, UK Finance said the value of 2026’s house purchase lending could be below its December forecast of a 2% rise, and close at £128bn.
Affordability seems to ease
A previous report from UK Finance said affordability pressures would weigh on activity this year, but in Q1, this started to level off.
However, it said new borrowers still needed a larger share of their income to cover mortgage repayments than in 2023, after rates spiked following the mini Budget and before the global financial crisis.
Affordability improved in March as mortgage pricing fell, and the organisation said it had yet to see the effect of the conflict in the Middle East, particularly on surging interest rates.
It said that with the average five-year fixed rate around 80 basis points higher in March than it was in February, it expected a deterioration in affordability.
UK Finance said the impact also depended on how long the war continued, so it was still difficult to make confident predictions of how this would influence mortgage affordability and demand.
Arrears trend downward and possessions stay flat
Mortgage arrears continued on their downward path, making it two years of uninterrupted declines. However, the rate of decline slowed compared to 2025.
UK Finance said the slower rate was likely because arrears were nearing the record lows seen before they started to rise in December 2022, leaving little room for improvement.
In Q1, there were 88,130 mortgages in arrears of over 2.5% of the outstanding balance, a 2.1% fall on the arrears recorded in December. Improvements were seen across severe and light arrears.
Although the conflict in the Middle East impacted mortgage pricing, borrowers are still able to keep up with payments, and most borrowers on rates linked to the base rate will have seen no increase, due to the Bank of England’s hold.
While markets now predict two base rate rises this year, the impact on mortgage payments is expected to be modest.
Possession numbers were flat in Q1, following the yearly decline seen in Q4 due to lenders pausing possession activity over Christmas and the new year. UK Finance said possessions usually rose in Q1 because of the moratorium and while this happened in the first quarter of the year, the rise was minimal compared to Q4.
There were 2,060 mortgage possessions in Q1, just 80 more than the previous quarter, a rise of 4%. This was also flat on the same period last year, which saw 2,030 possessions.
A modest increase in possessions is expected this year, but UK Finance’s forecast for 9,400 possessions would still be less than half the annual average over the last 50 years.
