By Hannah Phaup
The Bank of England compiles and publishes mortgage interest rate statistics starting with 1995 data. But other sources of mortgage rates data, which could be used to supplement these statistics, are available from the One Bank Research data sets compiled by the Bank of England. A new tranche of data was added recently, extending the mortgage rates back to 1853.
Mortgage interest rates data are important, both from a policy and household decision-making perspective. In July 2015 the Bank of England added to the historical data on mortgage rates, providing data back to the mid-1850s. This data set can be used alongside currently published mortgage interest rates statistics.
In this article, we provide an example of how the different sources of mortgage rates data can be spliced together in a continuous series, incorporating both the sources of historical mortgage rates and currently published effective rates on the stock of fixed and variable mortgages. This combined series is shown in Chart A.
The series can be a useful tool to assess the relationship between policy rates (Bank Rate in Chart A) and mortgage rates. It can also be used in analysis of other long-run economic variables provided in the ‘Three Centuries’ data set.
This article provides an overview of the sources behind this chart, with some information explaining how pricing in the mortgage market has changed over time.
The sources are listed in Table 1 and Table 2 below. The series in Chart A is composed of an average of the Halifax building society rates, the Building Societies Association (BSA) or, Office for National Statistics (ONS) building society average rate, and the Bank of England effective rate on the stock of mortgages.
Building society rates: 1853-1952
Building societies originated in the mid 19th century during the industrial revolution to enable workers to pool resources, buy land and build homes. Members deposited savings in an interest-paying fund, which in turn was available for others to borrow in the form of mortgage loans, on which they were charged interest. Building societies were the primary source of mortgage lending through much of the 19th and 20th centuries (Anderson, 2004).
In the historical data set, the earliest rates have been sourced from the Halifax. Average rates are also available from the Building Societies Association (BSA) from 1929, and Chart B shows that these mostly lie within the range of the Halifax rates. The BSA, originally the Building Societies Protection Association, was formed in 1869, acting as the national body for the industry.
Building society rates: 1929-1980s
In the 20th century, building societies accounted for the vast majority of the stock of mortgage lending and until 1980 operated an interest rate ‘cartel’ whereby the BSA Council recommended mortgage interest rates to be charged by its members (Anderson, 2004). Under this system mortgage rates were neither adjusted frequently, nor did they fully price in changes in market conditions (Lomax and Callen, 1990). Towards the end of the 1970s competition for retail deposits increased with individual building societies offering accounts outside the recommended rates system, and consequently a significant proportion of lending was undertaken at higher rates than recommended by the ‘cartel’. In September 1981, the BSA decided it would recommend only ordinary share (a form of deposit) and base mortgage rates (or standard variable rate). Later, in October 1983, it announced that it would only advise, rather than recommend rates. From November 1984, the BSA merely coordinated the timing of interest rate changes and indicated their approximate magnitude. Finally, in 1986 this limited role was abandoned. Since then, the setting of mortgage rates has been decided by individual lenders. The abolition of the building societies' interest rate ‘cartel’ led to mortgage rates moving more in line with money-market interest rates and, in general, being above them (Bank of England, 1990).
Also in 1983, tax arrangements changed enabling interest to be paid gross, leading to improvement in building societies’ access to wholesale market funding. They were able to continue funding lending when experiencing a shortfall in retail deposits by using wholesale funding instead (Bank of England, 1990).
Chart C shows both the BSA’s recommended rate and the average building society mortgage rate based on annual, and later monthly, returns provided by all building societies in the UK.
Before the 1980s almost all mortgages were priced at each lender’s standard variable rate (SVR), which varied little between lenders and hence there was no need for the official calculation of an average rate. During the 1980s and 1990s, the market for household loans became more competitive and dynamic. The introduction of more complex mortgage products led to the Bank’s growing need for more information about mortgage rates.
For example, fixed-rate mortgages were first offered in 1989, and were until the mid-1990s a fairly small share of new mortgage lending. The majority of mortgages were at a variable rate and so the rates charged for new mortgages would move in the same way as rates on the stock of existing mortgages.
The Bank began to compile and publish average interest rate statistics in the late 1990s: quoted interest rates data are available from 1995, and effective interest rates data from 1999.
Some examples of quoted rates are provided in Charts D and E, and effective rates series are shown in Chart F. An array of series are available through the Interactive Database.
In the Interactive Database, rates data are available in the ‘Interest and Exchange Rates Data’ section. Users can expand the ‘Effective Interest Rates’ module from the list and find stock mortgage rates under ‘Outstanding sterling loans by UK monetary financial institutions (excl. central bank)’, ‘Households’, ‘Secured on Dwellings’. New business rates can be found under ‘New business rates for sterling lending undertaken by UK monetary financial institutions (excl. central bank) in the month’, ‘Households’, ‘Secured on Dwellings’. To access quoted rates, users can expand the ‘Quoted household interest rates’ module from the
list and find mortgage rates under ‘Secured lending (mortgage) rates’.
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