Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278549 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
ESRB Working Paper Series No. 142
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts.
Subjects: 
mortgage choice
house prices
credit risk
interest rate risk
household risk management
household finance
JEL: 
D15
E43
G21
G22
G5
G52
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-329-1
Document Type: 
Working Paper

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