Mortgage demand softened as anticipated in the second quarter due to affordability pressures exacerbated by rising borrowing costs, a finance firm reports.
But it says things are likely to improve in the second half of 2026.
Stonebridge’s Mortgage Market Index says the average rate rose in the second quarter of this year to 4.97%. It was 4.31% in Q1 of this year, and the increase is put down to geopolitical tensions in the Middle East.
Alongside wider affordability pressures, higher mortgage rates largely explain the dent in mortgage applications, which Stonebridge says 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 a remortgaging wave that arrived in the first quarter, when remortgage applications were up 45.8% year-on-year.
- Mortgage demand softened in Q2 2026, largely due to affordability pressures and higher borrowing costs.
- The average mortgage rate increased from 4.31% in Q1 to 4.97% in Q2, driven in part by geopolitical tensions in the Middle East.
- Overall mortgage applications fell 18.5% year-on-year in Q2.
- Remortgage applications declined 20.8%, following a strong 45.8% increase in Q1 as borrowers rushed to refinance.
- Borrowers continue to roll off ultra-low pandemic-era fixed-rate deals, a trend expected to continue throughout 2026.
- Home purchase mortgage applications fell 15.5%, while first-time buyer applications declined 15.7% year-on-year.
- The average loan size decreased 1.8% to £209,932, although first-time buyers borrowed 1.5% more on average (£216,984).
- Inflation and oil prices remain key factors influencing mortgage rates in the second half of 2026.
- While the Bank of England base rate has remained unchanged, swap rates (which influence mortgage pricing) have fluctuated independently, meaning mortgage rates could still fall even without a base rate cut.
- If geopolitical tensions ease and inflation continues to moderate, mortgage affordability and demand are expected to improve in the second half of 2026.
- Mortgage advisers should remain proactive, particularly in supporting borrowers coming to the end of low-rate fixed deals and capitalising on ongoing remortgaging opportunities.
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 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 (the Bank of England governor) 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.
