could they lead to higher home ownership? – Bank Underground

Gabija Zemaityte

The Tony Blair Institute for Global Change, among others, has argued that long-term fixed-rate mortgages (LTFRMs) could increase home ownership in the UK. The share of mortgages with longer fixes increased in the UK and internationally over the last decade. Persistently low interest rates over that period have supported demand for longer-fix products, including five-year fixes. But differences in mortgage markets structures across countries are the main drivers of the prevalence of LTFRMs – here defined as mortgages with interest rates fixed for 10 years or more. In this post, I review the international experience, and argue that while LTFRMs can guard against interest rate risk, they do not necessarily increase home ownership. Indeed, some economies with high shares of LTFRMs exhibit lower home ownership.

The share of LTFRMs has increased internationally over recent years

The US, France and Belgium have been historically characterised by large shares of LTFRMs. The low interest rate environment, which prevailed for over a decade after the global financial crisis (GFC), made fixing mortgage rates for longer more attractive for borrowers. As a result, the shares of LTFRMs have increased further in those countries (Chart 1). In contrast, the share of LTFRMs has been very low in the UK – at around 0.2% in 2021 Q4 (and hence excluded from Chart 1) – and has not changed significantly over time. But low interest rates led to an increase in the share of mortgages in the UK with shorter fixed-rate terms (ie less than 10 years) relative to the share of variable rate mortgages. For instance, the share of new mortgage lending at five-year fixes had increased to 54% of the total by 2021 Q4, compared to less than 10% in 2011.

Increases in interest rates since the end of 2021 have led to some reversion in this trend internationally, but the share of longer fixes remains higher compared to the immediate aftermath of the GFC. In the UK, the share of new LTFRMs remains negligible.   

Chart 1: Share of long-term fixed-rate mortgages in total new mortgage lending internationally

Note: Italy and France show the share of all fixed-rate mortgages.

Sources: Banque de France, EMF and FHFA.

Institutional set-ups and consumer preferences drove the development of LTFRM markets internationally

Before getting into the relationship between LTFRMs and home ownership, it is important to stress that a number of structural features have supported development of the LTFRM markets in foreign jurisdictions. Those features have developed over a long period of time, which means that a substantial increase in the share of LTFRMs is unlikely to be achieved quickly. Some of those structural features include:

• Alternative funding models are in use internationally. For example, in the Danish mortgage market, specialised banks issue covered bonds to fund LTFRMs. And in the US, around half of new mortgages are originated by non-bank financial institutions, such as pension funds and institutional investors.
• The US is the largest secondary mortgage market in the world, where securitisation allows lenders to sell the mortgage after origination and provides a system to deal with the maturity matching of LTFRMs. But securitisation, as a funding model, does not come without its risks because, as seen during the GFC, obscure packaging of mortgages paired with weak underwriting standards can lead to significant financial distress.
• In most jurisdictions the borrower receives a pre-payment penalty if they repay their mortgage within the fixed interest period. It aims to protect lenders from bearing a substantial interest rate risk. However, such penalties can affect the desirability and flexibility of LTFRMs from the borrowers’ point of view. Countries with high shares of LTFRMs tend not to have pre-payment penalties. For example, in Denmark, there is no penalty for prepayment while in the US prepayment penalties only apply to the first three years of the loan.

The UK mortgage market is quite different to those with large shares of LTFRMs. Here, mortgages are predominantly funded by retail deposits. Funding in wholesale markets has halved since the GFC. There is limited securitisation and participation in secondary markets. Many products in the UK face early repayment penalties between 1% and 5%, more stringent than in other countries. 

Consumer preferences have also shaped the LTFRM market in the UK. While post-GFC declines in interest rates increased the demand for longer-term mortgage fixes, it has long been the case that UK borrowers have a preference for flexible mortgage products. In other words, they prefer products that benefit from falling loan to value ratios over time and, as noted in previous Bank research, prioritise low initial mortgage repayments over insulation from future interest rate shocks. The small size of the LTFRM market may also have led to low awareness of LTFRM products among mortgage brokers and consumers. The June 2024 FSR noted that mortgage spreads have tightened due to high competition in the UK mortgage market as a whole. This might affect development of larger LTFRM market, as new and/or smaller firms could struggle to compete on price, especially compared to two or five-year products.

Have LTFRMs supported home ownership internationally?

Some thinktanks have argued that LTFRMs could increase home ownership in the UK. To explore this claim, I compare home ownership rates across a number of economies, including those with substantial shares of LTFRMs.

Without trying to imply causation, comparing the share of LTFRMs with home ownership rates shows that LTFRMs do not seem to be associated with higher home ownership, which varies widely across advanced economies (Chart 2). Some countries with a high share of LTFRMs (>45%) have lower home ownership rates compared to countries where short-term fixes or variable rate mortgages are more prevalent, such as Australia, Italy and Canada. OECD data show that average home ownership in those three economies is 68%. Similarly, the UK at 67.3% has a higher home ownership rate compared to the top three LTFRM markets: France, US and Belgium, where the average rate is 64%. Home ownership has also changed little over the decade of low interest rates post-GFC across the sample of economies with high shares of LTFRMs. Institutions in those jurisdictions do not consider LTFRMs as a tool to increase homeownership. It is just seen as a structural feature of the market.

Chart 2: Home ownership rates internationally

Note: Shares of LTFRMs in Australia, Italy and Canada are essentially zero, so omitted from the chart.

Source: OECD Affordable Housing Database.

Indeed, some economies with a high share of LTFRMs have structurally lower home ownership rates. Again, causal relationship aside, there are factors that are pushing strongly in the other direction in relation to home ownership. Economic history and broader housing market structures are possible explanations. For instance, low home ownership rates in Germany are driven by a preference for renting due to high transfer taxes on buying real estate, a social housing sector with broad eligibility requirements as well as significant rights for tenants. And more recently, high house prices and a lack of subsidies for homeowners meant that the preference for renting remains high.

Summing up

This post looked at international experience to test the theory that LTFRMs might help to increase home ownership. In contrast to the analysis by some thinktanks, I do not find clear evidence from other jurisdictions that LTFRMs are associated with higher home ownership. Indeed, home ownership has been little changed across advanced economies over the last decade, despite fall in interest rates post-GFC. Of course, that is not to say that there would be no benefits from increasing the share of LTFRMs – consumers could still benefit from a wider range of choice for mortgage products. But, as shown by international experience, mortgage market structures tend to be highly embedded, and it could be difficult to achieve a meaningful increase in the availability of LTFRMs.

Gabija Zemaityte works in the Bank’s Macro-financial Risks Division.

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.