Northerners are more exposed to interest rate hikes, study shows

Homeowners in the north of England will be hit harder by interest rate increases than those living in the south, research by Nottingham Trent University shows.

Homeowners in the north of England will be hit harder by interest rate increases than those living in the south, research by Nottingham Trent University shows.

A study of long-term borrowing trends led by Alla Koblyakova - of the School of Architecture, Design and the Built Environment - shows that homeowners in the north are more than twice as likely to hold a variable rate mortgage than those in the south.

The study is based on data from around 1,000 mortgage holders and examines the propensity for people in different regions to take out different types of mortgages.

Based on economic calculations of regional incomes, employment rates, mortgage affordability ratios and house prices, the study has established that people living in the north have a 78 percent likelihood of holding a variable rate mortgage, compared with 35 percent for people in the south.

Ms Koblyakova said: "We have found that there is a persistent tendency for people in the north of England to hold variable rate mortgages, which is in stark contrast to people in London and the southern regions, who have a tendency towards longer term fixed rates.

"Our research suggests that this is a definitive feature of the UK mortgage market and the recent credit crisis has only added impulse to this trend.

"As variable rate mortgages are more sensitive to financial shocks, it's a matter of national economic concern that there is such a geographical imbalance in the way that mortgages are distributed in the UK.

"It's very important that policymakers are fully aware of this when considering future monetary policy decisions, as an increase in interests rates is likely to affect poorer regions much more severely than others."

The study found that people in regions with lower average incomes have a tendency to take out variable rate mortgages as they often come with lower interest rates and allow for larger sized loans.

It's very important that policymakers are fully aware of this when considering future monetary policy decisions.

Mortgage expert, Alla Koblyakova

This attracts the more constrained borrower, according to the study, who may have no option but to accept a variable rate contract in order to achieve the required mortgage size.

Variable rate mortgages in turn carry less risk for the lender. Under a variable rate mortgage, the risk of interest rate rises is passed on to the borrower, whereas under a fixed-rate contract this risk lies with the lender.

The research also found that Scotland and Wales – which, as similar to northern England, are characterised by lower=average incomes, higher unemployment rates and mortgage affordability ratios – also had an increased likelihood of mortgage holders taking out variable rate contracts.

The research was carried out in conjunction with Professor Norman Hutchison of the University of Aberdeen and Dr Piyush Tiwari of University of Melbourne, Australia.

It will be presented on 16 April by Ms Koblyakova at the Housing Studies Association Annual Conference 2014 at the University of York.

The study is based on figures from the British Household Panel Survey and incorporated data from the Bank of England, Nationwide, Halifax, Council of Mortgage Lenders and the House of Commons Library.

Data was taken over a nine year period – from 2001 to 2009 – in order to establish consumers' long-term propensities through diverse national economic situations, including a housing market boom and bust.

"What we've essentially found is that the more vulnerable people are being exposed the most to any future interest rate shocks," added Ms Koblyakova.

"In an economy like the UK, which has a large volume of mortgage debt that is held in variable rate contracts, an asymmetric response to interest rate increases could be a question for national financial stability."

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Northerners are more exposed to interest rate hikes, study shows

Published on 11 April 2014
  • Category: Research; School of Architecture, Design and the Built Environment

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