15 Years Since The Peak Of Mortgage Rates
9-Feb-2005
The mortgage market has changed considerably since the Standard Variable Rate (SVR) peaked 15 years ago at 15.40% in February 1990. From an interest rate of 9.8% in April 1988, mortgage rates had seen a steady upward trend until they peaked at an all time high of 15.4% between February and November, 1990.
One of the major changes to the mortgage market since 1990 has been the introduction and popularity of fixed rate mortgages. Halifax, the UK's largest mortgage lender, introduced its first fixed rate repayment mortgage in 1989, just before the peak of SVR mortgage rates. Halifax research highlights how this once new market innovation has now become part of the household furniture. According to the Council of Mortgage Lenders, fixed rate mortgages currently make up around 35 per cent of the new mortgage lending market, slightly below their peak of 50% in 1999. The research shows that the popularity of fixed rate mortgages amongst homebuyers is closely correlated to the difference in interest rates between fixed rate and variable rate mortgages. KEY FINDINGS - Fixed rate mortgages were first introduced in the late Eighties – variations of this type of mortgage were available prior to this, but take up was minimal. Halifax helped to root "a fixed rate of interest" in mainstream home owning culture in 1989 when it launched its first fixed rate mortgage offering a rate of 12.75%.
- SVR peaked at 15.40% in 1990 – throughout the year the 'average' SVR was 14.30%, but the average fixed rate mortgage was available at a lower amount of 13.75%.
- The appetite for fixed rate mortgages traditionally mirrors the move in interest rates. The percentage of fixed rate mortgages taken out increases when the average fixed rate falls below the average variable rate and vice versa.
- One of the conclusions in the review of the mortgage market (12th March 2004) by Professor David Miles of Imperial College London was that more borrowers could benefit from being protected from the impact of changes in interest rates by fixing one of their main monthly household expenses.
- Last year Chancellor Gordon Brown commissioned Professor Miles to examine why long-term fixed rate mortgages are less common in the UK than they are in the United States and continental Europe and the feasibility of developing a long term funding solution for mortgage providers. In the US, where fixed rates originated, homebuyers can chose from 10, 15, 20 or 30 year terms and between 10 to 25 years in Germany, Austria and Sweden. This is much longer than in the UK, where most mortgages are fixed for between two and five years. In Italy, Portugal and Spain variable rate mortgages are the most popular type of mortgage, mainly because mortgages are paid off across a shorter time-frame.
- In 1993 when the Bank of England base rate was six per cent for much of the year, the average fixed rate was 7.40 per cent, compared with 7.90 per cent for variable rate mortgages. Ten years later in 2003, base rates had reached their lowest level since 1954 at 3.5 per cent when the average fixed rate mortgage was 4.23 per cent, against an average variable rate of 4.60 per cent.
Craig Donaldson, head of mortgages at Halifax, commented: "Fixed rate mortgages have played an important part in helping to manage household expenses since they were launched just over 15 years ago. The certainty of payment achieves piece of mind."
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