30 years since the first fixed rate mortgage – what’s happened since?

When the Halifax Building Society, as it was then, launched the first UK fixed rate mortgage in November 1988 the interest rate charged was 12.75% and the average UK property price stood at £55,448*

Fast forward 30 years and the average rate for a 2-year fix (75%LTV) according to the Bank of England is 1.76%, while the average property price is more than quadruple 1988 levels at £232,797*

So how has the mortgage and property landscape changed in the last three decades?

Affordability

In November 1988 the monthly mortgage repayment for someone borrowing 75% of the average house price was £461 and accounted for 44% of the average gross salary.

Even though house prices have frequently increased year on year, lower interest rates kept the percentage of salary well below this 44% mark until the figure peaked at 46.1% in 2007 – not surprisingly this was followed by a house price correction of around 13.7% in 2008.

Today a 75% LTV mortgage on the average UK house price accounts for a much smaller 29.1% of the average gross salary thanks to a historically low average mortgage rate of 1.76%

However, the cost as a percentage of gross salary has edged back up from 26.2% in 2013 and with the double whammy of property prices and interest rates both creeping upwards the pressure on affordability will continue to increase.

Note – the ONS average earnings figure has been used as a yardstick in my calculations to show the fluctuating impact of changing house prices, interest rates and mortgage costs – I fully appreciate that many cases households will have more than one income and that others will earn higher or lower salaries.

Monthly repayments

Back in 1988 the monthly repayment on the average 75% LTV mortgage of £41,586 amounted to £461 per month at a rate of 12.75%.

If the average rate was still 12.75% today, the monthly repayment on the current average 75% LTV mortgage of £174,598 would be £1,963 per month – fortunately with the average rate at just 1.76% for a 2-year fixed rate, monthly repayments are approx. £719.

So since 1988 the average property price has more than quadrupled (x 4.2) but much lower interest rates mean monthly average mortgage repayments are only just over one and a half times higher (x1.55).

If we didn’t have the option of fixed rate mortgages, you must question how many people would be prepared to borrow the six figure sums now required to buy their home, knowing that their monthly mortgage payment and household budget were vulnerable to fluctuations and market forces outside their control.

Fixed rate mortgages have revolutionised the residential borrowing market and are fundamental to many consumers who seek the financial certainty and stability that this breed of mortgage product provides.

Popularity of fixed rates

As we are at the stage in the economic cycle where the Bank of England is predicting further interest rises, it’s not surprising, that according to UK Finance, 95% of new mortgage borrowing is currently via a fixed rate.

It’s a very different story compared with 1996 when only 1 in 5 mortgages (19%) were fixed rate and in 2010 when it was 1 in 2 (50%) but in the last 4 years at least 9 out of 10 new mortgages have been fixed rate.

As for the number of fixed rate products numbers have soared from reportedly barely a dozen back in 1989 to around 3000 plus products today.

Product innovation means there’s not just a far greater choice in the number of mortgage products, but also in the product specification.

It’s now possible to fix your rate from anything between 2 years and 10 years, opt for a fixed rate with high product fee or choose a higher rate and no product fee combination.

New names have entered the fray in recent years – with the likes of Virgin Money, Sainsbury’s Bank, Tesco Bank, M&S Bank, Atom Bank and Metro Bank challenging the established mortgage giants

The mortgage market is unrecognisable from that thirty years ago, it is far more competitive and dynamic – who knows where we’ll be in terms of rates, house prices and affordability in another three decades.

What the lenders say:

Nick Smith, TSB’s Head of Mortgages, comments: 

“Since their introduction 30 years ago fixed rate mortgages have totally revolutionised the mortgage market.  They were introduced during a period of rapidly rising interest rates and they provided borrowers with not only interest rate stability, but they also enabled them to plan their future finances with real confidence.  These key features remain as relevant today.

 

“Over the last few months we have seen a lot of borrowers shift their focus away from short-term fixed rate deals and instead they are now looking to fix their loans for a minimum of 5 years.”

 

Paul Collins head of product management at Sainsbury’s Bank said: “Fixed rate mortgages are really popular, especially in times of uncertainty, as they give people peace of mind as they know what they have to pay every month.  We’re offering 2 or 5 years and up to 95% loan to value.

 

Full data table here 30 years of fixed rate mortgages

ENDS

*Source: HM land registry data

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