When choosing a mortgage, a key question is whether to choose a fixed or variable-rate contract. By choosing the former, households are unaffected by official interest-rate decisions for the length of the fixation period. We can use transaction data on residential mortgages to get a sense of how long it takes interest-rate decisions to filter through to people’s finances.
The chart below shows how interest-rate pass-through has changed over time. The green line shows how long the average new mortgagor has to wait before monetary policy decisions affect monthly repayments. Before the Financial Crisis, people had just over a year to wait before their payments adjusted to changes in Bank Rate. Today, people wait almost three times as long.
This remarkable change in policy transmission is driven by two forces, shown in the chart below. First, the proportion of people taking out variable-rate mortgages has fallen from around a third in the Great Moderation to less than 1-in-20 today. Second, people are choosing to fix their rates for longer. This could be because interest rates are expected to rise gradually over the next few years from today’s low levels. There is also a certain attraction to minimising interest-rate risk when the world looks so uncertain.
Longer-term fixed-rate products are available in many countries (e.g. the 30y fix is common in the US). It is nevertheless interesting that mortgaged households in the UK have never been more insulated from interest-rate changes than they are today.
Fergus Cumming works in the Bank’s Monetary Policy Outlook Division.
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