UK Finance’s Q2 2026 Household Finance Review outlined a mortgage market that has made a very tentative recovery.
Positively, the report highlighted underlying strength in purchasing demand for now. Overall, house purchase lending for the year through to July was just under 1% lower than the same period last year.
Mortgage affordability unlikely to ease back to pre-war levels
First-time buyer affordability was affected greatly by the steep rise in swap rates after the outbreak of conflict in Iran.
Fixed rate mortgage pricing shot upwards by around 100 basis points.
By June, the typical first-time buyer faced mortgage payments equating to 22.6% of their gross income, higher than at any point since the 2008 global financial crash.
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The report was less optimistic about the outlook for mortgage affordability, and said it was “impossible” to predict pricing amid uncertainty due to the conflict.
However, it asserted that new mortgage rates were unlikely to “ease back to even the stretched levels seen immediately before the war.”
UK Finance called on regulators to review mortgage lending rules, suggesting the cap on high loan-to-income lending could be increased from 4.5 times income to five times income.
It argued that the change could increase borrowing capacity for creditworthy first-time buyers without materially increasing risk.
Refinancing surges ahead of fixed-rate maturities
There were 529,750 refinancing transactions in Q2, with product transfers remaining the dominant choice for borrowers.
These accounted for 81% of all refinancing activity during the quarter.
The growth comes ahead of a significant refinancing challenge in the second half of 2026, with around 900,000 residential mortgages due to reach the end of their fixed rate periods.
Around half of those borrowers are coming off five-year fixed-rate deals taken out in 2021, when mortgage pricing was at historic lows.
While these homeowners are likely to face substantially higher rates when they refinance, UK Finance noted that many will have reduced their outstanding mortgage balances through five years of capital repayments, helping to lessen the impact of higher borrowing costs.
James Tatch, principal of analytics at UK Finance, said: “First-time buyers are facing the greatest affordability pressure since 2008, as higher mortgage rates mean repayments absorb a larger share of their income.
“By contrast, most borrowers refinancing have already repaid part of their mortgage and benefited from income growth since they first took out their loan, helping to limit the effect of higher rates.
Mortgage arrears gradually improve
Mortgage arrears continued to fall in Q2, but at a relatively slower pace than seen in 2024 and 2025.
At the end of the quarter, 86,340 mortgages were in arrears representing more than 2.5% of the outstanding balance, down 2% from March.
Arrears levels are now just 8% above the historic low recorded in 2022, with UK Finance suggesting the more gradual pace of improvement reflects the market nearing normalised levels rather than any deterioration in economic conditions.
The trade body added that many remaining arrears cases related to mortgages originated before lending standards were tightened in 2014. As these loans reach the end of their terms or exit lenders’ back books, the overall credit quality of UK mortgage lending is expected to improve further.
Possessions mark first annual fall in three years
There were 1,780 possession cases recorded in Q2, down 14% compared with the previous quarter and 16% lower than a year earlier. It was the first year-on-year contraction in possessions since Q3 2023.
While UK Finance cautioned that a single quarter does not confirm a long-term shift in trend, it noted that growth in possessions has been slowing steadily since Q3 2025.
Tatch added: “We do not expect remortgaging to create widespread affordability problems, but anyone worried about their payments should contact their lender as early as possible to discuss the support available.”
