Locking in the rate or staying flexible? Mortgage refinancing around an interest rate shock

Philippe Bracke, João F. Cocco, Elena Markoska and Purnoor Tak
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Philippe Bracke: Bank of England
João F. Cocco: London Business School
Elena Markoska: Bank of England
Purnoor Tak: London Business School

No 1203, Bank of England Staff Working Paper series from Bank of England

Abstract: This paper examines UK mortgage refinancing around the 23 September 2022 mini-budget interest rate shock, exploiting predetermined expiry dates of discounted two and five year fixed-rate mortgages. We find: (a) a shift toward two-year fixes, even though they priced above five-year mortgages; and (b) deleveraging, with a 200 basis points rate rise linked to a 2–3 percentage points drop in average loan to value ratios. Although the adjustable-rate mortgage share increased, most borrowers still chose the pricier two-year fix, consistent with seeking rate risk protection plus near-term flexibility for equity extraction if rates fall, an interpretation supported by evidence that near-term equity extraction is likelier under two than five-year loans.

Keywords: Mortgages; deleveraging; interest rates; flexibility; equity extraction; leverage cycles (search for similar items in EconPapers)
JEL-codes: E31 E52 G5 G51 (search for similar items in EconPapers)
Pages: 70
Date: 2026-08-28
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