The Demand and Supply of Mortgage Fixation Periods. Managing Interest Rate Risk and Credit Risk in a Low Rate Environment

62 Pages Posted: 21 Jan 2017

See all articles by Benjamin Guin

Benjamin Guin

Bank of England

Christoph Basten

University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)

Cathérine Koch

Bank for International Settlements (BIS)

Date Written: September 21, 2015

Abstract

We disentangle the demand and supply determinants of mortgage rate fixation periods. Our unique dataset features offers from multiple banks for each individual mortgage request. We how that households respond to the relative cost of different fixation periods. However, we also find that banks drive the empirical evidence that more vulnerable households are associated with longer fixation periods. This finding contrasts with the existing literature which interprets this as the households’ choice. We demonstrate how banks influence fixation periods through several channels to trade off interest rate risk against credit risk, and we find that banks’ choices depend on both bank and household characteristics, as well on the interbank market environment.

Keywords: Interest Rate Risk, Credit Risk, Mortgages, Fixation Period

JEL Classification: D12, E43, G21

Suggested Citation

Guin, Benjamin and Basten, Christoph and Koch, Catherine, The Demand and Supply of Mortgage Fixation Periods. Managing Interest Rate Risk and Credit Risk in a Low Rate Environment (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2902850 or http://dx.doi.org/10.2139/ssrn.2902850

Benjamin Guin (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Christoph Basten

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40 Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Catherine Koch

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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