Assessing a portfolio of 100,000 accounts, Pepper Advantage showed this was the first improvement in arrears since Q3 2022 and the “most dramatic change” since Q4 2023, when inflationary pressures on household budgets were most keen.
The firm said it was also the first time since Q2 2021 that arrears had fallen across every region in the UK.
This was driven down by a 4.7% fall in residential arrears, as buy-to-let (BTL) arrears rose by 0.9% in Q2, following a modest decline in the previous quarter.
However, Pepper Advantage said the rise in BTL arrears was slower than that seen in H1 last year, when there was an increase of more than 10% in Q1 and Q2. Annually, BTL arrears are 9.5% higher.
The largest improvements in arrears were seen in the North West, where the rate fell by 7.9%, Wales, with a 7.7% decline, and the East Midlands with a 7% reduction.
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The smallest declines were recorded in London, at 0.9%, and the South East, at 3.1%.
Pepper Advantage said the rates of BTL arrears seemed to correlate with changes in interest rates, while residential arrears were more aligned with inflation.
Significant fall in declined direct debits
Pepper Advantage also found that the rate of direct debit rejections (DRRs) declined by 5.1% in Q2. This was the largest fall since Q2 2021.
The firm said that, along with the improvement in arrears, this suggested that the economic environment for homeowners was getting better.
Aaron Milburn, managing director for the UK at Pepper Advantage, 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.”
