Our analysis shows that long-term fixed-rate mortgages have become more popular since 2016. More than half the mortgages issued in 2019 Q4 have interest rates fixed for five years or longer.
But why are more borrowers opting for long-term fixed-rate mortgage products?
There are two factors to consider: new mortgage rules and a shift in interest rates.
In 2014, the Financial Policy Committee (FPC) introduced new rules, including a requirement for mortgage lenders to stress-test mortgage affordability. The rules act as an ‘insurance policy’ to protect against imprudent lending and a further rise in the number of highly indebted households.
The affordability test requires mortgage lenders to ensure that new mortgage borrowers could afford their mortgage if interest rates went up by 3% within the first five years of the loan.
Long-term fixed-rate mortgages (five years or more) are not covered by the mortgage affordability rules, meaning that lenders do not need to stress test these borrowers. The FPC noted that this could make long-term fixed rates more attractive to borrowers.
Also, there could be an incentive for lenders to offer borrowers these products in order to circumvent the mortgage affordability rules. However, our analysis shows that lenders typically stress test all borrowers, meaning long-term fixed-rate mortgages tend not to be treated differently.
We believe that lower interest rates have had more impact on the popularity of long-term fixed-rate mortgages than the mortgage affordability rules.
When the Monetary Policy Committee (MPC) decided to cut interest rates in August 2016, following the EU referendum, the share of the new mortgage lending with long-term fixed-rate mortgage products began to grow (Chart A).
