Fixed rate mortgages are massively popular with consumers, 68 per cent of all mortgage products from building societies in the first half of 2015 were fixed rate.
With the narrative from the Bank of England hinting that the base rate will start to rise later this year or early 2016, the drive from the public to fix their monthly repayments will only go one way – up.
Against this backdrop smaller building societies and banks face a major challenge from the EU. To lend at fixed rates, mortgage providers must protect themselves, buying derivatives to hedge against the risks associated with interest rates.
Acquiring derivatives is not the issue, the challenge comes from the European Market Infrastructure Regulation (EMIR). This puts an obligation on every credit institution, irrespective of size or systemic importance, to clear derivatives through a central counterparty with contracts reported to a trade depository.
The absolute lending volumes from smaller building societies and banks sees their need for derivative trading and clearing limited to around 10-15 trades a year.
The availability of clearing counterparties in the market as a whole has fallen and those that are left and willing to clear for players with limited business volumes has dropped sharply.
At the same time clearing costs have risen, making it increasingly uneconomic whether these smaller lenders go it alone or club together.
Without change to EMIR smaller building societies and banks will have few viable options other than to withdraw from the fixed rate mortgage market.
Clearly this will be bad for both existing and aspiring homeowners, with less fixed rate lending capacity in the market. It is also anti-competitive, giving an unfair advantage to larger providers, to the detriment of challenger banks and existing challengers like those building societies which provide for regional markets and customers with more complex needs.
But there may be light at the end of the tunnel. EMIR aims to safeguard financial stability. None of the affected credit institutions poses a systemic risk. The European Commission is currently reviewing EMIR and the logic is surely to include a threshold which excludes the need for these smaller credit institutions to clear through a central counterparty, something other jurisdictions like the USA have already recognised. EMIR itself already carves out non-financial counterparties.
In his Mansion House speech on 10 June, the chancellor talked about the issue of ill-designed EU regulation. This has to be a prime example which can and must be changed.