Improving Mortgage Lending and Housing Affordability but Challenges Remain.

Pressure is slowly starting to ease off the mortgage market after a challenging spell dominated by harsh affordability conditions. Some signs are pointing towards improved lending conditions throughout the remainder of 2025 and into 2026, but the market is fluctuating. Mortgage payments are on a downward trend overall since 2023 and have remained below the average rental payment throughout the second quarter of 2025.

In addition, the government has implemented a mortgage guarantee scheme enabling first time buyers to put down as little as a 5% deposit. However, despite recent tailwinds, there remains heightened political risk causing greater uncertainty around the short-term trajectory of mortgage payments.

After a period of turmoil in 2022 and 2023, markets responded with cautious optimism following Labour’s landslide victory in the 2024 General Election at the dawn of a new political era with a government with a huge majority that was seen as capable of ‘getting things done’. The first signs of easing appeared last summer when the bank rate was cut by 0.25 percentage points after the July 2024 meeting, followed by two further consecutive cuts in November and most recently in August this year, when the base rate was cut to 4%.

Figure 1: UK base rates (%)

Key findings explored.

01. Mortgage affordability is slowly improving

The average mortgage payment in Scotland peaked at the end of 2023. Since then, average payments have fallen due to declining mortgage rates and with income growth outpacing house price growth. This has helped to revitalise the housing market, which has been impacted by tough lending conditions in recent years. The average mortgage payment based on an average 2-year fixed rate mortgage is now £1,057 compared to £1,200 at the end of 2023. Affordability can be measured by estimating the percentage of the average gross household income spent on the mortgage payment for the average house. Edinburgh has historically been the least affordable city in Scotland, with the average mortgage payment accounting for up to half of the average income in 2022. The average payment in the Capital has now fallen to under 40% of the average household income in Q2 2025.
Glasgow remains at a significant discount to Edinburgh, with the average mortgage payment accounting for c.30% of the average household income, in line with the national average. Nevertheless, these average payments are well in excess of the levels achieved pre-2022, which has been a factor is subduing the sales market. The average mortgage payment in Scotland has remained below the average rent since Q1 2024, with the average rent now at £1,250pcm. The average monthly mortgage payment is now 15% lower than the average rent, which is the greatest differential since 2021, which does incentivise people to buy rather than rent.

02. Mortgage lending is nearly back to pre-pandemic levels.

Mortgage lending in the UK suffered significant reductions over 2021-23. Since 2024, the number of new UK mortgage approvals has gradually increased and is now only 10% below pre-pandemic averages. In Scotland, mortgage activity is also recovering. The latest data available from UK Finance indicates that the number of new mortgages for first time buyers and home movers increased by 22% YOY.

03. Challenges ahead.

Recent cuts to the base rate will be welcome news to most, although other factors (such as swap rates, which are the interest rates that banks charge each other for borrowing and which are then priced into products such as mortgages) will continue to impact the extent to which mortgages rates begin to fall. Many commentators expected mortgage payments to fall by more than they have following recent base rate reductions, but the
average mortgage payment drifted upwards at the end of 2024. Through the first half of 2025, average mortgage payments have fallen, but future falls may be limited as the swap rate now sits above the bank rate. We can therefore expect mortgage rates to remain stubbornly high in the short term.

Recent cuts to the base rate will be welcome news to most, although other factors (such as swap rates, which are the interest rates that banks charge each other for borrowing and which are then priced into products such as mortgages) will continue to impact the extent to which mortgages rates begin to fall. Many commentators expected mortgage payments to fall by more than they have following recent base rate reductions, but the
average mortgage payment drifted upwards at the end of 2024. Through the first half of 2025, average mortgage payments have fallen, but future falls may be limited as the swap rate now sits above the bank rate. We can therefore expect mortgage rates to remain stubbornly high in the short term.

Conclusion.

The UK mortgage market has entered a period of cautious recovery. Falling base rates, easing mortgage costs, and government support schemes have already helped reduce the average Scottish mortgage payment to £1,057 in Q2 2025, 15% below the average rent and down from over £1,200 in late 2023. Mortgage activity is now only 10% below pre-pandemic levels, with first-time buyer volumes in Scotland up 15.7% year-on-year.
Affordability, however, remains stretched relative to long-term norms, with payments still consuming around 30–40% of average household income in Scotland’s largest cities. Elevated swap rates and global uncertainty are also likely to limit the pace of further reductions in mortgage costs, with most forecasts pointing to base rates stabilising in the 3.5–4% range over the next 12 months. Looking ahead to 2026, further modest easing in rates combined with supportive government schemes should continue to draw more buyers back into the market. First-time buyers will remain the key driver of activity, while homeowners remortgaging will need to carefully manage affordability pressures as legacy lowrate deals expire. Monitoring the interaction between swap rates, inflation trends, and government policy will be crucial in assessing how far and how fast affordability can improve.
Whether you’re a first-time buyer looking to step onto the property ladder, or a homeowner preparing to remortgage, the right advice can make all the difference. At Rettie Financial Services, we’re here to help you navigate the options with confidence and find the solution that works best for your circumstances.

Contact the team at:

Rettie Financial Services
0330 175 9977 | financialservices@rettie.co.uk

Or book a free initial mortgage consultation with one of our Mortgage & Protection Advisors