The UK mortgage market has moved decisively out of crisis mode, but it has not entered a true recovery phase. The data now tells a more nuanced story: lending volumes are rising modestly, refinancing activity is accelerating, arrears are falling, yet affordability constraints remain tight and transaction volumes are stagnating.
UK Finance’s latest mortgage market forecast for 2026 captures this transition clearly. Gross mortgage lending is expected to rise by 4% to £300 billion, yet property transactions are forecast to fall slightly year-on-year, and mortgage payments remain elevated relative to incomes. This is not a boom cycle. It is a market adjusting to structurally higher rates, tighter underwriting, and a slower housing economy.
For borrowers, lenders, and advisers alike, the next 12–18 months will be defined less by rate cuts and more by refinancing pressure, product strategy, and borrower resilience.
Lending growth exists, but it is narrowly distributed
At headline level, mortgage lending appears resilient. Lending for house purchase grew strongly in 2025, rising 22% to £176 billion, driven in part by buyers rushing to complete ahead of the April stamp duty change. That surge, however, is not expected to repeat.
For 2026, UK Finance forecasts only 2% growth in purchase lending, taking volumes to £180 billion. The reason is not a collapse in demand, but affordability friction. Mortgage payments remain materially higher than pre-2022 levels, while wage growth has not fully offset higher interest costs.
Buy-to-let tells a similar story. Lending rose 11% in 2025 to £11 billion, but is forecast to remain flat in 2026, constrained by tax changes, regulatory drag, and yields that no longer compensate many landlords for higher borrowing costs.
The implication is important: lending growth is increasingly concentrated among higher-income, lower-LTV, and more resilient borrowers. The marginal buyer is still being squeezed out.
Transactions are flat because confidence is flat
Despite higher lending values, the number of property transactions is expected to edge down from 1.21 million in 2025 to 1.20 million in 2026, and remain broadly unchanged into 2027.
This disconnect between lending value and transaction volume reflects three realities:
- Average loan sizes are higher
- Equity-rich movers are dominating activity
- First-time buyers face structural affordability limits
In other words, the market is turning over, but not expanding. That matters because transaction volumes, not lending totals, are what drive broader housing market liquidity.
Refinancing is the real story of 2026
The most important dynamic in the mortgage market is not new lending, but refinancing.
In 2025, 1.6 million fixed-rate mortgages expired. In 2026, that figure rises to around 1.8 million. This is why remortgaging activity surged in the second half of this year and will remain elevated.
UK Finance expects:
- External remortgaging to rise 10% to £77 billion
- Product transfers to increase 2% to £261 billion
Borrowers coming off ultra-low fixed rates are still experiencing payment shocks, even where headline rates have stabilised. The market response has been pragmatic: many borrowers are opting for internal product transfers to avoid affordability reassessments, while others are refinancing early to lock in certainty rather than chase marginal rate reductions.
Arrears are falling, and that matters more than rates
One of the most under-appreciated signals of market health is arrears data, and here the picture has improved meaningfully.
UK Finance’s Mortgage Arrears and Possessions Update for Q3 2025 shows that total mortgages in arrears of 2.5% or more fell to 84,100, down 4% quarter-on-quarter and 10% year-on-year. Buy-to-let arrears fell even faster, declining 8% quarter-on-quarter and 20% year-on-year
Crucially, arrears now account for just 0.97% of homeowner mortgages and 0.54% of buy-to-let mortgages outstanding, placing the market close to the historically low levels seen in 2022.
This tells us something important: despite higher rates, most borrowers have adapted. Cost pressures have eased, income has adjusted, and lender forbearance during the rate shock has largely worked.
Possessions are rising, but from an artificially low base
Mortgage possessions increased in 2025 and are forecast to rise again in 2026, with UK Finance expecting around 9,400 possessions next year, a 9% increase.
That headline figure can sound alarming without context. In reality, possessions remain far below pre-pandemic norms, and the increase reflects a return to operational normality rather than a wave of distress.
The Q3 2025 data shows 1,390 homeowner possessions and 900 buy-to-let possessions in the quarter, both higher than earlier periods but still modest by historical standards.
Possession remains a last resort. The data suggests targeted stress rather than systemic failure.
What this means for borrowers
For homeowners and investors, the market conditions point to four practical realities:
First, affordability tests remain the binding constraint. Even if base rates fall modestly, lender stress testing will not loosen quickly.
Second, refinancing strategy matters more than headline rate chasing. Term length, product structure, and early engagement with lenders increasingly determine outcomes.
Third, arrears data suggests resilience, but not immunity. Borrowers with thin buffers remain vulnerable to income shocks.
Fourth, transaction timing now matters less than structure. The market is no longer rewarding speed, but preparation.
What this means for the mortgage market
From an industry perspective, the UK mortgage market in 2026 will be characterised by:
- High refinancing volumes
- Stable but subdued purchase activity
- Selective lender risk appetite
- A widening gap between strong and marginal borrowers
This is a structurally different market to the one that existed before 2022. The era of cheap leverage is over. The era of measured, resilience-driven lending has begun.
Looking ahead
The outlook for 2026 is not pessimistic, but it is disciplined. Lending will grow, but slowly. Transactions will hold steady, not surge. Borrowers will adapt, but affordability will continue to cap demand.
For those navigating the market, understanding lender behaviour, refinancing cycles, and risk thresholds now matters more than trying to time rate cuts. Essentially, get used to high rates, high deposits, and high scrutiny, and build them into your strategy
Thinking about a mortgage?
If you are approaching a remortgage, buying a property, or reviewing your options in a higher-rate environment, an informed conversation early can materially change the outcome.
If you are thinking about a mortgage, get in touch to discuss your options.
