The arrears rate dropped by 0.3% in the third quarter of this year, the latest data from Pepper Advantage’s portfolio of residential mortgages reveals.

The data found this is only the second drop in arrears since the third quarter of 2022 and follows a 4.4% decline in Q2 2025.

Residential mortgages saw a 0.2% drop in the arrears rate, although this is a deceleration from the 4.7% decrease observed in Q2.

The buy-to-let (BTL) arrears rate increased slightly by 0.1%, and direct debit rejections, a form of missed payment, fell 7.9%.

Pepper Advantage says this data indicates that the recent instability seen in the company’s BTL portfolio may be past its peak, as many landlords who struggled in a higher rate environment have exited the market.

Total UK direct debit rejections grew by 4.2% in Q3, contrasting with a 5.1% decline in Q2.

It says this increase may indicate rising financial strain amid ongoing inflationary pressures, which saw consumer prices index including owner occupiers’ housing costs rise 4.1% in August 2025.

Elsewhere, data shows that in Q3 there was also a rebound in new mortgage originations, which surged by 20.2% compared to the prior quarter when demand for new originations evaporated following the March expiration of the Stamp Duty holiday.

Pepper Advantage UK managing director Aaron Milburn says: “While we have witnessed a decrease in the arrears rate for the second quarter, the contextual factors suggest that the situation remains precarious for many borrowers.”

“Our data, particularly the rise in direct debit rejections, indicates that the overall improvement in arrears, while encouraging, may not reflect a sustained positive trend. We remain watchful as inflation continues to impact household budgets, particularly with rising food and drink costs, as we head into the holiday season.”