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Mortgage product innovation in advanced economies: more choice, more risk

Scanlon, Kathleen, Lunde, Jens and Whitehead, Christine M. E. (2008) Mortgage product innovation in advanced economies: more choice, more risk. European Journal of Housing Policy, 8 (2). pp. 109-131. ISSN 1461-6718

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Abstract

In many developed countries, house prices have been rising rapidly, mortgage debt has been increasing and affordability has worsened. It is in this context that the standard annuity mortgage is increasingly being supplanted by mortgages with non-standard features, such as longer terms or interest-only payments. Many of these new features aim to reduce the borrower's monthly debt service in the initial period of the loan. While these new mortgage types help households to enter owner-occupation and to vary their expenditure patterns, the long-term cost to the borrower cannot normally be less than for a standard product. Moreover, such mortgages can also be more risky: the interest-only borrower does not accumulate equity as an annuity borrower does, and loans with longer terms expose the borrower to greater risk of interest-rate or other economic shocks. As a result both borrowers pay more and the housing finance system may be more fragile. This paper brings together evidence from 13 developed countries about house prices, debt and affordability, and particularly the availability and market share of mortgages with these new features. It analyses trends over the last ten years and discusses the risks of these mortgages compared to standard annuity products.

Item Type: Article
Official URL: http://www.tandf.co.uk/journals/reuj
Additional Information: © 2008 Taylor & Francis
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
Journal of Economic Literature Classification System: R - Urban, Rural, and Regional Economics > R3 - Production Analysis and Firm Location > R31 - Housing Supply and Markets
Sets: Departments > Economics
Research centres and groups > Spatial Economics Research Centre
Research centres and groups > Greater London Group
Research centres and groups > LSE London Centre for Urban and Metropolitan Research
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 09 Nov 2010 11:42
URL: http://eprints.lse.ac.uk/29889/

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