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

In many developed countries the standard annuity mortgage is increasingly being supplanted by mortgages with nonstandard 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. This reflects both borrower demand (as house-price rises have led to affordability problems) and regulatory relaxation. While these new mortgage types have lower initial payments than standard annuity loans, the long-term cost to the borrower is not less. 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. This paper brings together evidence from thirteen developed countries about 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.