The relationship between interest rates and the structure of new loans for house purchase

Nominal interest rates on new loans for house purchase rose following the increases in monetary policy interest rates in October 2005. However, interest rates with various fixation periods have shown mixed trends since 2006 H2, and this has affected the structure of new loans for house purchase. In line with the evolution of the yield curve, rates fixed for shorter periods (up to one year)  1)   have increased, while rates with longer fixations have tended to decline. The spreads between long-term and short-term interest rates have thus decreased (see Chart 1).

Although loans with longer interest rate fixations account for the majority of total loans, their share declined between 2004 2) text za  and mid-2006 (see Chart 2). This trend reversed in mid-2006, with the share of longer interest rate fixations rising to 65% and that of shorter interest rate fixations falling to 35% (this reversal was particularly strong for loans with interest rate fixations of over one and up to five years and with interest rate fixations of up to one year). This reflected a decline in spreads between long-term and short-term rates. The rise in the share of loans with long-term rates may also reflect sufficient MFI funds raised through mortgage bond issues, efforts of MFIs to increase the availability of loans by extending their maturities, and stronger competition between MFIs on this segment of the loan market.

Overall, the above information indicates that households' decisions regarding interest rate fixation periods on new loans are governed by initial expenses. The current rise in the proportion of loans with long-term interest rates suggests that households have started to show a greater preference for loans with longer interest rate fixations. The rise in the share of loans with interest rate fixations of over one year and up to five years (especially fixations of three years) can be regarded as positive as regards hedging by households against future interest rate increases. Nevertheless, if interest rates rise across all maturities in the long term, there could be adverse effects on households' balance sheets, especially in the case of low-income households.

Similar movements in the structure of interest rates and the shares of new loans have also been visible since the end of 2005 in the euro area, where the spreads between long-term and short-term rates have almost disappeared. The share of loans with longer interest rate fixations in the euro area has increased, reaching 56% in May.

1)  Interest rates with a fixation period of up to one year also include floating interest rates.
2)  Data on the structure of new loans for house purchase and the interest rates on such loans are available from 2004 onwards.