15-years since the peak of mortgage rates

It has been 15 years since the peak of mortgage rates, one major change has been the introduction of fixed rate mortgages.

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.


* 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. (Please see table in Editors' Notes.)

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."

Key events over the duration of Halifax's fixed rate mortgages and surrounding the peak of mortgage rates are as follows:


* Halifax launched its first fixed rate repayment mortgage.

* The Prime Minister in 1989 was Margaret Thatcher. The Chancellor of the Exchequer in 1989 was Nigel Lawson who resigned in October to be replaced by John Major.

* During her time as Prime Minister (May 1979 to November 1990), Margaret Thatcher raised home ownership from 54% to 65% and over 1 million people bought their council house through the 'Right to Buy Scheme.

* The FTSE 100 doubled in the late 1980s, breaking the 2,000 mark. The economic 'boom' was fuelled by cheaper oil, large privatisation offerings, pro-industry budgets, falling interest rates and inflation that appeared to be coming under control.

* In 1989 Mrs Thatcher introduced her Government's own property tax - 'The Poll Tax' - in Scotland.

* Inflation, based on the Retail Price Index, was running at 7.8 per cent in 1989, while the Bank of England base rate was 14 per cent for much of the year, before peaking at 15 per cent in October 1989.

* The average UK house price was £68,754 in the fourth quarter of 1989, down from £69,659 in the third quarter.

The nineties

* Poll tax was introduced to England and Wales in 1990.

* In October 1990, a month before Margaret Thatcher's resignation, the UK entered the European Exchange Rate Mechanism at a level, which many commentators thought to be too high.

* Mortgage rates peaked at their highest ever level of 15.40% between February and November 1990.

* After ten years in power Mrs Thatcher resigned on 22nd November 1990 and was succeeded by Mr. Major. The FTSE 100 Index was 2,128.

* Membership of the European Exchange Rate Mechanism (ERM) brought about new pressures and continued speculation on currency markets caused bank base rates to rise from 10% to 12% on September 16th 1992, with a further threat that they would move to 15% the following day.

* The UK left the ERM the following day and base rates fell back to 10%.

* Poll tax was abolished in 1993.

* The threshold for stamp duty on residential property transactions increased from £30,000 to £60,000 in March 1993.

* The freedom away from the ERM allowed the Government to reduce base rates and they gradually fell back to 5.25% by 1994.

* As the UK enjoyed a period of economic stability, house prices started to rise again and between 1993 and 1996 mortgage rates remained at below 8.5%. The UK was experiencing a period of low inflation and low interest rates. Houses became more affordable and activity in the housing market started to pick up.

* Tony Blair's Labour came to power in May 1997. Labour immediately announced that the control of interest rates would reside with the Bank of England.

* Interest rates rose and bank base rates ended 1997 at 7.25%.

* Higher rates of stamp duty on properties valued over £250,000 and £500,000 were introduced in July 1997.

* Mortgage Interest Tax Relief was gradually reduced and by April 1998 tax relief was restricted to 10%.

* 1999 saw a rapid rise in house prices, particularly in Greater London and the South East. House prices in Greater London rose by almost 30% during the year and demand continued to outstrip supply.

After 2000

* In the Budget of 1999, the Government announced that from April 2000, Mortgage Interest Tax Relief was to be abolished.

* 2001 saw the lowest level of new housing completions (162,600) since 1947.

* There were 24.7m households in 2001.

* 2.15m housing transactions were recorded in 2002.