The European Mortgage Federation has conducted its first study on interest rate variability in Europe.
The study provides an in depth analysis of the broad spectrum of interest rate types that exist in mortgage products offered across the EU, their development over the past few years and the reasons for the underlying country differences.
Dynamic product innovation over recent years has significantly increased the range of ways in which interest rates can vary, especially due to the greater choice of mortgage products tailored to consumers specific needs that is now available.
Based on EMF calculations, mortgages with an initial fixed period remain the dominant type of loan in the EU in terms of both new business and balances outstanding, with a share of approximately 53% and 60% respectively.
At country level, the picture is very mixed. Some countries are dominated by fixed rate products whereas others witness a greater use of variable rate products.
Fixed rate countries include Belgium, Denmark, France, Hungary, the Netherlands and Sweden. Variable rate countries include Greece, Spain, Ireland, Italy, Luxembourg, Portugal and the United Kingdom
However, in analysing new lending business such a sharp distinction is not possible. The split between fixed and variable interest rates on new business can change very quickly as mortgage markets are highly dynamic. For instance, in the UK, which is traditionally regarded as a variable rate country, in 2005 the proportion of initial fixed rate mortgages exceeded variable rate mortgages due to a shift in the yield curve.
The fact that variable or fixed rate products are more dominant in a given country stems from a number of factors such as cultural habits, early repayment regulations, caps and floors, methods of funding and the introduction of the Euro.
The same factors mentioned above also contribute towards the different degrees of completeness of EU mortgage markets. This has been well documented in the co-branded study by the EMF and Mercer Oliver Wyman (2003), and in studies such as that by London Economics (2005) as well as the Miles Review (for the UK, 2004).
Improving product completeness and the range of individuals who have access to housing finance in Europe are two of the key benefits that are expected to arise from better integration of EU mortgage markets.