Mortgage Contract Design David Miles Monetary Policy Committee - PowerPoint PPT Presentation

Mortgage Contract Design David Miles Monetary Policy Committee Bank of England Federal Reserve Bank of New York May 2015

rate Percentage of UK mortgages that are fixed Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 0% 10% 20% 30% 40% 50% 60% 70% 80% 2

Proportions of new fixed rate loans - by length of fix 80% 70% Percentage of new Fixed Rate Loans 60% Less or equal to 2 yrs 50% 3 yrs 40% 4 to 5 yrs 30% 20% Greater than 5 yrs 10% 0% 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 2009.4 2010.2 2010.4 2011.2 2011.4 2012.2 2012.4 2013.2 2013.4 2014.2 2014.4 Caveat: Only 41% of the fixed rate loans in the database provided information on the length of the fix. Conclusions drawn from the chart above therefore assumes that the propensity to report the length of the fix is uncorrelated with the length of the fix. 3

Effective interest rates on the stock of mortgages 7% Effective rate 6% on all mortgages 5% Effective rate 4% on variable rate 3% mortgages Effective rate 2% on fixed rate mortgages 1% Bank Rate 0% Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 4

Mortgages arrears (stock) and possessions (flow) Per cent of mortgages Percent of mortgages More than 3 months (right-hand scale) More than 6 months (right-hand scale) 0.1 4.0 Quarterly possessions rate (left-hand scale) 3.5 0.1 3.0 0.1 2.5 0.1 2.0 0.1 1.5 0.0 1.0 0.0 0.5 0.0 0.0 95 97 99 01 03 05 07 09 11 13 5

UK House Prices Halifax (advanced 2 months) Percentage change on a year Nationwide (advanced 2 months) earlier ONS (advanced 1 month) Land Registry 30 25 20 15 10 5 0 -5 -10 -15 -20 2000 2003 2006 2009 2012 2015 6

Help to Buy: Equity Loans Format and Eligibility • New-build homes in England with a maximum purchase price of £600,000 (c.$900,000). • Minimum 5% deposit; maximum 20% government equity loan ; remainder (up to 75%) from conventional mortgage. • Must be the only property of the buyer. Fees and Repaying the Loan • No fees for first 5 years; thereafter 1.75% p.a. • Cost of loan repayment depend on the market value of the property at the time of repayment (or sale of property). 7