Swap rate volatility and Middle East tensions weigh on Q2 activity, Stonebridge data reveals
Mortgage demand fell in the second quarter of 2025, with application volumes sliding 18.5% year-on-year, according to the latest Mortgage Market Index from mortgage and protection network Stonebridge.
The network attributed the decline largely to higher mortgage rates, which rose above their previous 2025 peak during the period. The average mortgage rate reached 4.97% in Q2, up from 4.74% in Q1 2025 and 4.31% in Q1 2024.
Stonebridge said escalating conflict involving Iran pushed oil prices higher, which fed into swap rates — the benchmarks used to price mortgage products — and reversed much of the rate progress recorded through last year.
Remortgage applications fell 20.8% year-on-year in Q2, though Stonebridge noted this must be read alongside a 45.8% annual surge in remortgage activity in Q1, when a significant wave of pandemic-era fixed deals began to expire. That refinancing cycle is expected to continue throughout 2026.
Applications for home purchase declined 15.5% annually, while first-time buyer volumes dropped 15.7%. Average loan sizes fell 1.8% to £209,932, though first-time buyers borrowed marginally more than the prior year, with average loans of £216,984 — a 1.5% increase.
The trend aligns with separate Bank of England data published earlier in late June, which recorded a 10.8% annual decline in mortgage approvals for May.
Rate uncertainty continued to shift borrower behaviour towards shorter-term products. The share of two-year fixes rose 10.6 percentage points, from 59.4% to 70%, while five-year fix uptake fell 9.1 percentage points to 23.2%. Variable rate products more than doubled their share, from 5.2% to 12.1%, as borrowers positioned themselves to benefit from any future rate reduction.
"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," said Rob Clifford (pictured right), chief executive of Stonebridge. "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."
Clifford said borrowers were being caught between rising oil prices and UK inflation on one side, and the prospect of lower mortgage rates and new product pricing on the other.
He noted that prior to the latest escalation in the Middle East, oil had been falling faster than most had anticipated, pulling borrowing costs down with it, and said it remained possible that trajectory could resume if the conflict stabilised. However, he cautioned that international affairs had repeatedly defied expectations.
On monetary policy, Clifford said it was important to distinguish between the Bank of England base rate and mortgage rates. He noted that swap rates — which lenders use to price products — had risen this year even as the base rate held steady, meaning borrowing costs could fall independently of any decision by the Monetary Policy Committee. He described Bank of England governor Andrew Bailey's recent tone as cautious, and said rising oil prices were unlikely to prompt the MPC to act.
"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," Clifford added.
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