The UK’s reliance on variable rates amplifies instability and raises house prices.
The UK housing market has been called "volatile" for its obsession with variable rate mortgages by a study from Nottingham Trent University.
The research, conducted by Dr Alla Koblyakova at the university's School of Architecture, Design and the Built Environment, said three quarters of homeowners are on riskier variable or short-term fixed rate mortgages which amplifies instability and raises house prices.
Koblyakova said: “This study provides empirical evidence that the prevalence of variable-rate or short-term fixed rate mortgage debt amplifies fluctuations in house prices in the UK.
“The findings suggest that the structural features of the mortgage funding system, such as higher profit margins for lenders who provide variable rate contracts, is a major driver of this.
“The concern is that this leaves the UK, which holds 74% of its mortgage debt in variable or short-term fixed rate contracts, extremely vulnerable to financial shocks, such as changes in monetary policy, house prices fluctuations and cuts in people’s personal incomes.”
The research noted that lenders are more inclined to offer higher loan-to-value ratios on variable rate mortgages which pushes the most vulnerable into taking out a variable rate.
Koblyakova added: “The upturn of this is that the most vulnerable borrowers are put at the highest risk. And the more people can borrow, the more demand for property increases, which in turn drives prices up.
“But the data also shows that if there was more securitisation – the practice of investors buying pools of debt as secured assets – then lenders become more inclined to offer better long-term fixed rate contracts, which can have a stabilising effect on the market.
“Following the global financial crisis, there is little evidence of securitisation being practiced in the UK today. But if practiced properly it could help control house prices, make them less volatile and protect the most vulnerable borrowers from future financial shocks.”
The study was based on a sample of more than 2,000 mortgage holders between 2001 and 2014 and was taken from the Bank of England Data Archive, Nationwide House Price Index, European Mortgage Federation and Council of Mortgage Lenders.