Mortgage arrears are forecast to fall further over the next two years even as borrowers continue to refinance off ultra-low pandemic-era deals, according to the Intermediary Mortgage Lenders Association (IMLA).

In its New Normal 2026/27 report, the trade body projects that the proportion of mortgage accounts in arrears will decline from an estimated 0.85% at the end of 2025 to 0.80% by the end of 2026 and 0.74% in 2027, close to historic lows.

The data suggests the housing market has weathered the sharpest interest rate tightening cycle in decades more effectively than expected, standing out as one of the more resilient areas of an otherwise subdued UK economy.

IMLA attributes the performance to post-financial crisis reforms that tightened underwriting standards and embedded more stringent affordability testing across the market. It argues that those safeguards have left borrowers better prepared for higher rates.

TOUGHEST TEST

Kate Davies (main picture, inset), executive director of IMLA, said: “The last two years represented the toughest test the mortgage market has faced since the financial crisis.

“Tight post-crisis safeguards and robust affordability assessments meant borrowers were better prepared for higher rates than many anticipated. As a result, arrears are now falling even before rates have fully normalised.”

The association said the strength of borrower outcomes raises questions about whether parts of the current regulatory framework have become overly restrictive, particularly for first-time buyers.

“The system is more resilient than many may have assumed.”

Davies added: “The performance of the market over the past two years shows that the system is more resilient than many may have assumed.

“Record-low arrears and strong borrower outcomes suggest that regulation and lending practices have been highly effective in managing risk but also that, in some areas, they may have gone further than was strictly necessary.”

MORE AMBITIOUS

And she said: “The evidence now suggests we can afford to be more ambitious. With arrears low, equity levels high and affordability improving, there is a strong case for continuing to ease access to homeownership in a measured way, so that more first-time buyers can safely take their first step onto the housing ladder.”

IMLA estimates that around 3.5 million households who might historically have bought since the financial crisis remain in the private rented sector, constrained by affordability and regulatory barriers, a cohort the association believes could be unlocked through calibrated reform.