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Fixed-rate mortgages: building resilience or generating risk?

Author

Listed:
  • Kelly, Jane

    (Central Bank of Ireland)

  • Myers, Samantha

    (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.

Suggested Citation

  • Kelly, Jane & Myers, Samantha, 2019. "Fixed-rate mortgages: building resilience or generating risk?," Financial Stability Notes 5/FS/19, Central Bank of Ireland.
  • Handle: RePEc:cbi:fsnote:5/fs/19
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    References listed on IDEAS

    as
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