Gabija Zemaityte
The Tony Blair Institute for International Change, amongst others, has argued that long-term fixed-rate mortgages (LTFRMs) may enhance dwelling possession within the UK. The share of mortgages with longer fixes elevated within the UK and internationally over the past decade. Persistently low rates of interest over that interval have supported demand for longer-fix merchandise, together with five-year fixes. However variations in mortgage markets buildings throughout international locations are the primary drivers of the prevalence of LTFRMs – right here outlined as mortgages with rates of interest mounted for 10 years or extra. On this submit, I assessment the worldwide expertise, and argue that whereas LTFRMs can guard in opposition to rate of interest threat, they don’t essentially enhance dwelling possession. Certainly, some economies with excessive shares of LTFRMs exhibit decrease dwelling possession.
The share of LTFRMs has elevated internationally over current years
The US, France and Belgium have been traditionally characterised by giant shares of LTFRMs. The low rate of interest surroundings, which prevailed for over a decade after the worldwide monetary disaster (GFC), made fixing mortgage charges for longer extra engaging for debtors. Because of this, the shares of LTFRMs have elevated additional in these international locations (Chart 1). In distinction, the share of LTFRMs has been very low within the UK – at round 0.2% in 2021 This autumn (and therefore excluded from Chart 1) – and has not modified considerably over time. However low rates of interest led to a rise within the share of mortgages within the UK with shorter fixed-rate phrases (ie lower than 10 years) relative to the share of variable charge mortgages. As an example, the share of latest mortgage lending at five-year fixes had elevated to 54% of the entire by 2021 This autumn, in comparison with lower than 10% in 2011.
Will increase in rates of interest because the finish of 2021 have led to some reversion on this development internationally, however the share of longer fixes stays increased in comparison with the quick aftermath of the GFC. Within the UK, the share of latest LTFRMs stays negligible.
Chart 1: Share of long-term fixed-rate mortgages in whole new mortgage lending internationally
Observe: Italy and France present the share of all fixed-rate mortgages.
Sources: Banque de France, EMF and FHFA.
Institutional set-ups and shopper preferences drove the event of LTFRM markets internationally
Earlier than moving into the connection between LTFRMs and residential possession, it is very important stress that a variety of structural options have supported growth of the LTFRM markets in overseas jurisdictions. These options have developed over a protracted time period, which signifies that a considerable enhance within the share of LTFRMs is unlikely to be achieved shortly. A few of these structural options embody:
- Various funding fashions are in use internationally. For instance, within the Danish mortgage market, specialised banks difficulty coated bonds to fund LTFRMs. And within the US, round half of latest mortgages are originated by non-bank monetary establishments, similar to pension funds and institutional traders.
- The US is the biggest secondary mortgage market on this planet, the place securitisation permits lenders to promote the mortgage after origination and supplies a system to take care of the maturity matching of LTFRMs. However securitisation, as a funding mannequin, doesn’t come with out its dangers as a result of, as seen throughout the GFC, obscure packaging of mortgages paired with weak underwriting requirements can result in important monetary misery.
- In most jurisdictions the borrower receives a pre-payment penalty in the event that they repay their mortgage inside the mounted curiosity interval. It goals to guard lenders from bearing a considerable rate of interest threat. Nevertheless, such penalties can have an effect on the desirability and suppleness of LTFRMs from the debtors’ perspective. Nations with excessive shares of LTFRMs have a tendency to not have pre-payment penalties. For instance, in Denmark, there isn’t a penalty for prepayment whereas within the US prepayment penalties solely apply to the primary three years of the mortgage.
The UK mortgage market is sort of completely different to these with giant shares of LTFRMs. Right here, mortgages are predominantly funded by retail deposits. Funding in wholesale markets has halved because the GFC. There’s restricted securitisation and participation in secondary markets. Many merchandise within the UK face early compensation penalties between 1% and 5%, extra stringent than in different international locations.
Client preferences have additionally formed the LTFRM market within the UK. Whereas post-GFC declines in rates of interest elevated the demand for longer-term mortgage fixes, it has lengthy been the case that UK debtors have a desire for versatile mortgage merchandise. In different phrases, they like merchandise that profit from falling mortgage to worth ratios over time and, as famous in earlier Financial institution analysis, prioritise low preliminary mortgage repayments over insulation from future rate of interest shocks. The small measurement of the LTFRM market can also have led to low consciousness of LTFRM merchandise amongst mortgage brokers and customers. The June 2024 FSR famous that mortgage spreads have tightened because of excessive competitors within the UK mortgage market as a complete. This would possibly have an effect on growth of bigger LTFRM market, as new and/or smaller corporations may wrestle to compete on worth, particularly in comparison with two or five-year merchandise.
Have LTFRMs supported dwelling possession internationally?
Some thinktanks have argued that LTFRMs may enhance dwelling possession within the UK. To discover this declare, I examine dwelling possession charges throughout a variety of economies, together with these with substantial shares of LTFRMs.
With out making an attempt to indicate causation, evaluating the share of LTFRMs with dwelling possession charges reveals that LTFRMs don’t appear to be related to increased dwelling possession, which varies broadly throughout superior economies (Chart 2). Some international locations with a excessive share of LTFRMs (>45%) have decrease dwelling possession charges in comparison with international locations the place short-term fixes or variable charge mortgages are extra prevalent, similar to Australia, Italy and Canada. OECD knowledge present that common dwelling possession in these three economies is 68%. Equally, the UK at 67.3% has a better dwelling possession charge in comparison with the highest three LTFRM markets: France, US and Belgium, the place the typical charge is 64%. Dwelling possession has additionally modified little over the last decade of low rates of interest post-GFC throughout the pattern of economies with excessive shares of LTFRMs. Establishments in these jurisdictions don’t contemplate LTFRMs as a instrument to extend homeownership. It’s simply seen as a structural characteristic of the market.
Chart 2: Dwelling possession charges internationally
Observe: Shares of LTFRMs in Australia, Italy and Canada are basically zero, so omitted from the chart.
Supply: OECD Inexpensive Housing Database.
Certainly, some economies with a excessive share of LTFRMs have structurally decrease dwelling possession charges. Once more, causal relationship apart, there are elements which might be pushing strongly within the different path in relation to dwelling possession. Financial historical past and broader housing market buildings are potential explanations. As an example, low dwelling possession charges in Germany are pushed by a desire for renting because of excessive switch taxes on shopping for actual property, a social housing sector with broad eligibility necessities in addition to important rights for tenants. And extra just lately, excessive home costs and a scarcity of subsidies for householders meant that the desire for renting stays excessive.
Summing up
This submit checked out worldwide expertise to check the speculation that LTFRMs would possibly assist to extend dwelling possession. In distinction to the evaluation by some thinktanks, I don’t discover clear proof from different jurisdictions that LTFRMs are related to increased dwelling possession. Certainly, dwelling possession has been little modified throughout superior economies over the past decade, regardless of fall in rates of interest post-GFC. After all, that isn’t to say that there can be no advantages from growing the share of LTFRMs – customers may nonetheless profit from a wider vary of selection for mortgage merchandise. However, as proven by worldwide expertise, mortgage market buildings are usually extremely embedded, and it might be troublesome to attain a significant enhance within the availability of LTFRMs.
Gabija Zemaityte works within the Financial institution’s Macro-financial Dangers Division.
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