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

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