The review also pointed to continued momentum into the third quarter with the number of applications received seeing a likely uptick

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.

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 dip in mortgage lending in early Q2 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 8% respectively.

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, UK Finance expects remortgaging activity to increase over the remainder of the year.

Changes to lending rules

The review said that rising interest rates since 2022 had 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. UK Finance data shows that among borrowers now paying above their previous stress test rate, 1.75% are currently in arrears—compared with just 0.21 % of those paying below that threshold.

UK Finance says 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 review said it was heartened by the FCA being open to discussion on whether—and how—these rules might be revised to support higher levels of homeownership. Any changes would involve accepting a greater risk of future arrears.

Modelling based on the 1.75% 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, UK Finance suggests any loosening that significantly boosts demand without a corresponding increase in housing supply would likely drive-up house prices, negatively impacting affordability.

Commenting on the latest findings UK Finance managing director of personal finance Eric Leenders, said: “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.”