Staff Working Paper No. 1,158
By Aniruddha Rajan, Francesc Rodriguez-Tous and Mauricio Salgado-Moreno
We study how monetary policy affects the fixation structure of mortgage contracts, a feature that is crucial for how household consumption adjusts following changes in policy rates. Using loan‑level data covering the universe of residential mortgages in the UK, we show that lenders do not adjust the relative supply of mortgages with different fixation lengths in response to changes in the level of interest rates, but they do so following changes in the term spread. Monetary policy‑induced increases in the slope of the yield curve cause lenders to increase the supply of longer‑fixation mortgages. This effect is particularly strong for lenders with a greater share of fixed‑rate mortgages in their existing portfolios – consistent with an interest rate risk management motive – as well as during expansionary monetary policy episodes. When monetary policy is contractionary, however, increases in the term spread lead banks to increase the supply of shorter as compared to longer‑fixation mortgages. Finally, we find that the choice of monetary policy instrument has material – and directionally opposing – implications for the supply of mortgages at different fixation lengths.
Monetary policy and mortgage fixation lengths
