Nikka Sulton

The UK mortgage market is showing early signs of recovery, although conditions remain challenging for many borrowers, particularly those trying to buy their first home.

The latest UK Finance Household Finance Review for Q2 2026 points to relatively resilient demand for home purchases despite continued pressure on mortgage affordability. Lending for house purchases over the 12 months to July was just under 1% below the level recorded during the same period a year earlier.

However, the picture is considerably tougher for first-time buyers, whose mortgage repayments have been taking up an increasing share of their income.

First-Time Buyers Under Growing Pressure

Mortgage affordability for first-time buyers has been hit by the sharp increase in swap rates following the outbreak of conflict in Iran.

As a result, the cost of fixed-rate mortgages rose by around 100 basis points, creating additional pressure for people trying to get onto the property ladder.

By June, the typical first-time buyer was spending 22.6% of their gross income on mortgage repayments. According to UK Finance, this represents the highest level of affordability pressure seen since the global financial crisis in 2008.

The organisation also warned that mortgage pricing could remain difficult to predict while uncertainty surrounding the conflict continues.

It said there was little expectation that new mortgage rates would return to the already stretched levels seen immediately before the outbreak of the conflict.

UK Finance has therefore called for regulators to reconsider existing mortgage lending restrictions. One proposal is to increase the limit on high loan-to-income lending from 4.5 times annual income to five times income.

The trade body believes this could give financially sound first-time buyers greater borrowing capacity without significantly increasing lending risks.

Refinancing Activity Picks Up

While first-time buyers are facing increased affordability challenges, refinancing activity has been particularly strong.

UK Finance recorded 529,750 refinancing transactions during Q2, with borrowers continuing to favour product transfers rather than switching to a different lender.

Product transfers accounted for 81% of all refinancing activity during the quarter.

The increase in refinancing comes ahead of a potentially busy second half of 2026. Around 900,000 residential mortgages are expected to reach the end of their fixed-rate periods during the remainder of the year.

A significant proportion of these borrowers took out five-year fixed-rate mortgages in 2021, when borrowing costs were close to historic lows.

As these deals expire, many homeowners are likely to move onto substantially higher mortgage rates.

However, UK Finance believes the impact may be less severe for existing borrowers than for first-time buyers. Those who have held their mortgages for five years will generally have reduced their outstanding balances through regular capital repayments. Many will also have seen their incomes increase since their original mortgage was taken out.

This means that although their new mortgage rate could be considerably higher, the overall increase in monthly costs may be partly offset by a smaller loan balance and higher earnings.

James Tatch, principal of analytics at UK Finance, said first-time buyers were experiencing the greatest affordability pressure since 2008 because rising mortgage rates were taking up a larger proportion of their income.

He added that homeowners coming to the end of fixed-rate deals were in a different position because many had already paid down part of their mortgage and benefited from income growth.

Mortgage Arrears Continue to Decline

There was also some positive news surrounding mortgage arrears during the second quarter.

The number of mortgages in significant arrears continued to fall, although the rate of improvement has slowed compared with 2024 and 2025.

At the end of June, 86,340 mortgages were more than 2.5% behind on their outstanding balance. This was a 2% reduction from March.

Arrears are now only around 8% above the historic low recorded in 2022.

UK Finance believes the slower decline does not necessarily point towards deteriorating economic conditions. Instead, it suggests that arrears are moving closer to more normal levels after the substantial improvements seen over the past couple of years.

The remaining cases are also more likely to involve older mortgages that were issued before lending standards became stricter in 2014.

As these older loans reach the end of their terms or gradually leave lenders’ back books, the overall quality of mortgage lending is expected to improve further.

Repossessions Fall for the First Time in Three Years

The number of mortgage possession cases also fell during Q2, providing another indication that financial pressure on homeowners may be easing.

There were 1,780 possession cases recorded during the quarter. This was 14% lower than the previous quarter and represented a 16% fall compared with the same period in 2025.

It marks the first annual decline in possession cases since Q3 2023.

UK Finance has warned that one quarter of falling figures is not enough to establish a long-term trend. Nevertheless, the organisation has observed a gradual slowdown in the growth of possessions since Q3 2025.

The figures suggest that while some homeowners continue to face financial difficulties, the situation is not worsening at the pace seen previously.

Different Challenges for Buyers and Existing Borrowers

The latest figures highlight a clear divide within the mortgage market.

First-time buyers are particularly exposed to higher mortgage rates because they typically have larger loans relative to their income and have not yet benefited from years of capital repayments.

Existing homeowners refinancing in 2026, meanwhile, may have more protection because they have had time to reduce their mortgage balances and increase their earnings.

Even so, borrowers approaching the end of a fixed-rate deal could still face higher monthly payments and should plan ahead.

UK Finance has encouraged anyone concerned about meeting their mortgage payments to speak to their lender as early as possible. Lenders may be able to offer support or discuss alternative arrangements before a borrower falls into financial difficulty.

For prospective buyers, however, affordability remains one of the biggest obstacles to entering the housing market, with first-time buyers now facing their toughest mortgage affordability conditions since the 2008 financial crisis.