An assessment of 100,000 portfolios by Pepper Advantage showed this came after a more notable decline of 4.4% in Q2, which the firm said was a “welcome sign”, but the deceleration signalled that the improvement in borrowers’ finances was potentially temporary.
Across the residential mortgage portfolios analysed, the rate of arrears fell by 0.2%, compared to a drop of 4.7% in the previous quarter.
There was a small rise in the rate of buy to let (BTL) at 0.1%, but this was down from a rise of 0.9% in Q2 and compared to a 0.1% decline in Q1. Pepper Advantage said this stability in arrears suggested the recent turnover across its portfolio had passed its peak, and landlords who struggled with higher rates had exited the market.
When comparing fixed to variable rates, there were higher arrears rates across fixed products at 2.4%, while the rate of arrears across variable products was 0.4%.
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Debit rejections rise
Although the data showed arrears continued to fall overall, Pepper Advantage found that the direct debit rejection (DDR) rate rose 4.2% in Q3. This was a notable change from the 5.1% decline recorded in Q2.
Pepper Advantage said this rise, combined with the slowing of the deceleration of arrears, matched rising inflationary pressures.
Looking at borrower type, residential DDRs increased by 7.1% in Q2 while BTL DDRs fell by 7.9%, notable compared to the 8.4% decline in the previous quarter.
The firm said the fall in BTL mortgages experiencing a DDR suggested improvements in the financial situations of landlords and a structural shift. It said there was a larger-than-usual number of BTL landlords exiting last year and new originations had fallen to record lows.
The firm said this had since levelled out and new BTL originations rose 18.5% quarter-on-quarter in Q3 this year.
Originations rebound
The data showed a 20.2% increase in new originations in Q3, up from the previous quarter, which was impacted by the stamp duty change. The number of new originations was higher than average across each month in Q3, which Pepper Advantage said suggested demand was recovering.
Pepper Advantage manages organic origination for over 10 firms, and 80% are funded by capital markets.
A shaky recovery?
Pepper Advantage said rising food prices were putting fresh pressure on household finances, and the improvement in borrowers’ financial positions could be short-lived.
It said the outlook for the rest of the year was more “fragile” than it was three months ago, and the industry needed to be ready to support customers struggling financially.
