Mortgage demand slowed in Q2
Mortgage demand softened as anticipated in the second quarter due to affordability pressures exacerbated by rising borrowing costs, Stonebridge reveals today.
However, mortgage rates remain tricky to accurately predict while borrowers face being wrong-footed by renewed clashes in the Gulf, which sent oil prices and inflation expectations higher last week.
Stonebridge mortgage and protection network’s quarterly Mortgage Market Index lays bare today how the Iran conflict pushed mortgage rates back above their 2025 high in Q2.
Mortgage rates fell consistently last year but between April and June this year they were back above levels last seen in Q1 2025, which squeezed budgets and would have forced some borrowers to pause.
The average rate rose in the second quarter of this year to 4.97%. It was 4.74% in Q1 2025 and 4.31% in Q1 of this year, meaning the war in Iran had undone the progress made on mortgage rates last year, weakening demand and increasing pressure on monthly payments. Oil prices and, consequently, the swap rates used to price mortgages had then fallen significantly since mid-May until clashes restarted between Iran and the US last week.
Alongside wider affordability pressures, higher mortgage rates largely explain the dent in mortgage applications, which slid 18.5% year-on-year in Q2. A 20.8% drop in remortgages contributed to this but must be seen in the context of an enormous remortgaging wave that arrived in the first quarter, when remortgage applications were up 45.8% year-on-year. Many borrowers are currently rolling off ultra-low, pandemic-era deals and this will remain a feature throughout 2026.
Meanwhile, mortgage applications for home purchase declined 15.5% annually in Q2 alongside a 15.7% fall in first-time buyer applications. Loan amounts were down 1.8% on average to £209,932 though FTBs stretched to 1.5% more borrowing than last year at £216,984.
The softer picture for mortgage demand was echoed by the latest Bank of England data on mortgage approvals, which earlier this month reported a 10.8% annual decline for May2.
Rate volatility has also continued to push more borrowers towards shorter 2Yr fixes and variable rate deals, a tactic that allows homeowners to capitalise on any fall in rates. The share of 2Yr terms rose 10.6ppts from 59.4% to 70%, while 5Yrs dropped 9.1ppts from 32.3% to 23.2%. The share of variable rates more than doubled from 5.2% to 12.1%, while the share of fixed term deals fell from 94.8% to 87.9%.
Rob Clifford, Chief Executive at 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.”
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