Learning to Live with Fixed Rate Mortgages

An Evolutionary Approach to Risk Management

Martin Upton


Until the late 1980s fixed rate mortgages were a rarity in the United Kingdom. In the current world of personal financial services, though, they have now become a commonplace offering from the mortgage lending industry. In recent years they have accounted for a third of new mortgage lending with the bulk of the business being in shorter term products with rates fixed for one to five years.

In a highly competitive market the rates offered have afforded the lenders narrow margins over the cost of borrowing. Yet despite this competitive environment the fixed rate mortgage market has attracted interest and criticism from politicians and other observers culminating in the Miles Report on “The UK Mortgage Market: Taking a Longer-Term View” published in April 2004.

This article explains the development of the fixed rate mortgage market in the UK, the risk management and margin implications for the lenders, the potential future development of the market in the wake of the introduction of CAT standards for mortgages and the publication of the Miles Report, and the issues for mortgage lenders arising from the application from 2005 of International Financial Reporting Standards (IFRS).


Until the late 1990s the vast majority of mortgage lending was undertaken by the building societies – mutual organisations owned by their savers and mortgagors. ...

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