Higher borrowing costs weighed on mortgage demand during the second quarter, although Stonebridge says the outlook for the second half of the year remains more positive if inflation pressures ease.
Mortgage applications fell during the second quarter as higher borrowing costs and affordability pressures prompted some borrowers to delay purchasing or remortgaging, according to the latest Mortgage Market Index from Stonebridge.
The mortgage and protection network said average mortgage rates increased to 4.97% during the quarter, up from 4.31% in the first quarter of this year and above the 4.74% recorded in the first quarter of 2025.
Stonebridge said renewed tensions in the Gulf contributed to higher oil prices and inflation expectations, pushing up swap rates used to price mortgages.
The increase in borrowing costs coincided with an 18.5% year-on-year fall in overall mortgage applications during the second quarter.
Remortgage applications declined by 20.8% compared with the same period last year, although Stonebridge said this followed an exceptionally strong first quarter when remortgage applications increased by 45.8% year-on-year as borrowers continued to refinance maturing low-rate pandemic-era mortgages.
Purchase activity also softened, with home purchase applications falling 15.5% year-on-year, while first-time buyer applications declined by 15.7%.
The average loan size slipped by 1.8% to £209,932. However, first-time buyers borrowed an average of £216,984, representing a 1.5% increase on the previous year.
Stonebridge said borrowers continued to favour shorter-term products amid uncertainty over the direction of mortgage rates. The proportion selecting two-year fixed-rate mortgages increased from 59.4% to 70%, while the share choosing five-year fixed deals fell from 32.3% to 23.2%.
Variable rate products also became more popular, with their share rising from 5.2% to 12.1%, while fixed-rate mortgages accounted for 87.9% of completions, down from 94.8% a year earlier.
The network said the trend reflected borrowers seeking greater flexibility to benefit from any future reductions in mortgage rates.
Rob Clifford (pictured), chief executive of Stonebridge, said: “The second quarter was really a stick-or-twist moment for those thinking of moving, buying or remortgaging, and there’s no doubt we’ve seen activity slow a little as expected.
“However, the key thing to keep your eye on is the expected path for inflation as we move into the second half of the year. I am confident about the outlook.
“Borrowers are being put in a difficult position as oil prices and inflation in the UK can undermine the prospect of mortgage rate reductions and seductive, new product pricing.
“Before the latest flare-up, oil had been falling hard and much faster than expected. This had caught everyone by surprise and dragged borrowing costs down.
“It’s not impossible that we could find ourselves back on that path if the conflict settles down again but, if anything, we’ve learned to expect the unexpected when it comes to international affairs.
“Andrew Bailey has struck a cautionary tone recently and rising oil prices won’t encourage the MPC to drop rates, but it’s important to remember that mortgage rates and the Bank of England base rate are not the same thing.
“Swap rates, which the market uses to price mortgages, rose this year while the base rate went nowhere.
“So borrowing costs can fall back without the Bank of England doing anything and that’s exactly what had been happening until last week.”
“Advisers need to remain alive to the elevated remortgaging opportunities this year, and make sure they’re as proactive as possible in helping past customers navigate movements in borrowing costs.”
