Lending at lower stress test rates would result in an additional 175 arrears cases for each 10,000 additional loans granted, estimates from UK Finance show.
Its latest Household Finance Review for Q2 2025, UK Finance noted that the FCA has opened up a conversation on whether more risk could be permitted in the mortgage market, in the interests of widening access to homeownership.
UK Finance's analysis suggests that, under current conditions, allowing more lending at lower stress test rates would result in an additional 175 arrears cases for each 10,000 additional loans granted.
However, it also noted that "any loosening that led to significant additional demand, without a compensating response of new housing supply, would likely also result in higher house prices, and therefore tighter affordability".
The Review found that household spending dipped in the second quarter of this year, with inflation picking up again and continuing weak confidence in the wider economy bearing down on activity.
Mortgage lending dropped sharply in Q2, with many house purchase transactions brought forward to Q1 to beat the stamp duty changes. However, lending returned to growth in June and forward-looking data suggests some continuing underlying momentum.
Despite stronger numbers of maturing fixed rate mortgages this year, UK Finance says it has yet to see sustained growth in refinancing. Fewer loans on standard variable rates, as well as expectations of rate cuts to come, are depressing remortgage demand, but growth is expected in the coming months.
However, UK Finance says that with markets somewhat more cautious about expectations of a further cut this year, borrowers may need to wait until 2026 for another reduction in interest rates.
Mortgage arrears fell again in Q2, even amongst the more serious cases which had still been increasing through 2024. Possessions rose modestly but, with underwriting standards ensuring customers are resilient against adverse conditions, there is no expectation of numbers rising significantly above their current low levels.
