UK Finance today releases its latest Household Finance Review for Q2 2025, which explores trends in household spending, saving, and borrowing.
- Mortgage lending activity dipped in early Q2 following Stamp Duty changes but had recovered by June, with forward‑looking application data pointing to continued momentum into the third quarter.
- The FCA’s mortgage affordability stress test has helped keep arrears low on mortgages granted since its introduction, but has done so by restricting access to credit. UK Finance analysis suggests that a modest increase in lending, enabled by lower stress rates, could improve access to mortgages—especially for first-time buyers—without significantly raising arrears.
- Household savings balances grew further in Q2, with deposits surpassing previous highs as savers took advantage of competitive rates and an unchanged ISA allowance.
Mortgage market trends
Mortgage lending declined in the second quarter of the year, as many house purchase transactions were brought forward to Q1 to avoid the Stamp Duty changes.
The drop was concentrated in April, and after smaller declines in May, June saw a rebound, with annual growth in lending to first-time buyers and movers up 14 and eight per cent respectively.
Looking ahead, the number of applications received suggests a likely uptick in activity during Q3.
Despite a large number of fixed-rate mortgages maturing this year, refinancing has yet to show sustained growth and remains below expectations, with some customers likely delaying in anticipation of further interest rate cuts. Nonetheless, we expect remortgaging activity to increase over the remainder of the year.
The potential impact of changes to lending rules
Rising interest rates since 2022 have been the first meaningful test of the FCA’s 2014 lending rules. Despite sharp increases, most borrowers coming off fixed rate mortgages during this period faced rates below the levels they were originally stress-tested against.
The rate a customer pays relative to their original stress test threshold has a notable impact on the likelihood of falling into arrears. Among borrowers now paying above their previous stress test rate, 1.75 per cent are currently in arrears—compared with just 0.21 per cent of those paying below that threshold.
This demonstrates that the lending rules have generated two key outcomes: they have helped keep arrears low, but have done so by restricting access to credit. As a result, many potential borrowers have found their ability to secure a mortgage constrained.
The FCA has recently initiated a welcome discussion on whether—and how—these rules might be revised to support higher levels of homeownership. Such changes would involve accepting a greater risk of future arrears.
Modelling based on the 1.75 per cent arrears rate noted above suggests that, if all other factors remained constant, each additional 10,000 mortgages issued at a less stringent stress test rate could lead to approximately 175 additional loans falling into arrears.
To put these figures into perspective: each year, between 600,000 and 700,000 new house purchase mortgages are written, and there are currently around 87,000 homeowner mortgages in arrears.
However, any loosening that significantly boosts demand without a corresponding increase in housing supply would likely drive-up house prices, negatively impacting affordability.
Household savings
Savings balances continued to grow with strong inflows into cash ISAs and notice accounts as households responded to competitive rates.
Since late 2024, we have seen some growth in instant access accounts, although notice accounts and cash ISAs have seen the bulk of the increase in aggregate deposits. At the end of June, households held £295 billion of savings in notice accounts and £205 billion in cash ISAs, 12 per cent and 14 per cent higher respectively than seen in 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 – demonstrates the market’s resilience as we move into the third quarter.
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.”
