In the last decade, the proportion of long-term fixed rate mortgages has increased significantly. In fact, in Europe, has almost doubled since 2009. This is the x-ray of fixed and variable rate mortgages in the Old Continent prepared by Scope Ratings. According to their data, in August 2024, almost three quarters of new mortgages in Europe had a initial duration of five years or morewhile half had fixed rate periods of 10 years or morewhich protects borrowers against price shocks. «Although the higher types have recently begun to reverse this trend, structural differences in Europe have given rise to a series of rate management strategies between households and lenders,» says Mathias Pleissner, deputy director of mortgage covered bonds at Scope Ratings. As he explains, the proportion of variable rate mortgages is mainly due to the cost of borrowing, but there is substantial variation across Europe. Several factors may explain the difference in approach. The dynamics of interest rates significantly influences the behavior of borrowers: When interest rates fall, borrowers are expected to prepay fixed-rate mortgages to refinance them at lower rates, but when loans are prepaid, banks can suffer serious current value losses while facing to the reinvestment risk derived from lower rates. However, it is not always the bank that has to bear the prepayment risks. «National regulations vary widely in determining whether lenders require borrowers to compensate them if a mortgage is terminated before the end of the contractually agreed interest fixing date. In some European countries, the risk of early repayment falls predominantly on lenders, while in others, borrowers may be responsible for some or all of the associated costs,» says Pleissner. In detail by country, by example, in Germanythe risk of early repayment lies with borrowers, who must compensate lenders for the loss of interest and even margin. On the other hand, others like Belgium, France, Spain and Austria They take a more balanced approach. «Borrowers' responsibility is usually limited to a one-time payment of a few basis points or a few months of interest payments; the rest is borne by lenders. Borrower-friendly jurisdictions, such as Italy, do not provide for payment penalties. anticipated, so banks are affected by the current value if they do not cover their risks,» he points out. Consequently, it highlights that the behavior of borrowers in jurisdictions where lenders are favored tends to be more rigid when it comes to variable rate mortgagessince households cannot benefit from the evolution of market rates. On the contrary, Italy presents a high degree of volatility in variable rate mortgages and is more correlated with the level of interest rates and borrowers' rate expectations: when interest rates reach their maximum level, or when expectations move towards falling rates, Italian borrowers tend to opt for variable rate products and vice versa. Meanwhile, in borrower-friendly countries, lenders need to manage early repayment risk, but Covering it can be expensive, especially for smaller banks. One option is to transfer the risk to third parties. In Denmarkmortgage banks can issue covered bonds (SDROs) under the break-even principle, which in practice entails a transfer of all interest and principal cash flows to covered bond investors, who ultimately bear the largest part of the amortization and refinancing risk. However, the Danish principle of balance is not reflected in the rest of Europe. For many European banks, An easy solution is to offer variable rate mortgages, which transfer the risk of refinancing to borrowers. «Most households lack the means or knowledge to protect themselves against sudden changes in interest rates, which can put pressure on markets predominantly exposed to variable rate mortgages,» he says.