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Fixed-rate mortgages: building resilience or generating risk?

Jane Kelly and Samantha Myers
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Jane Kelly: Central Bank of Ireland
Samantha Myers: Central Bank of Ireland

No 5/FS/19, Financial Stability Notes from Central Bank of Ireland

Abstract: In recent years, there has been a rapid shift away from traditional variable-rate mortgages toward fixed-rate mortgages in Irish and other European mortgage markets. While many of these products are equivalent to short-term ‘teaser-rate’ mortgages, the fixation periods available appear to be slowly lengthening. There is no clear framework to help policymakers and other stakeholders analyse the effects of a shift from variable-rate to fixed-rate mortgage contracts (or vice-versa). We address this gap, focussing on financial stability and with reference to the Irish context. We find that while fixed-rate mortgages can build household resilience, this should increase the cost of a mortgage. Pricing risk is shifted from households to banks, who must then diversify it away through funding markets or through market hedges, and pass the costs of their risk management strategies through to households. We analyse jurisdictions that have large quantities of long-term fixed-rate mortgages, and determine that the ability of banks to diversify away their pricing risk depends on numerous jurisdiction-specific regulatory and institutional factors.

Date: 2019-05
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