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Refinancing cross-subsidies in the mortgage market

Author

Listed:
  • Fisher, Jack

    (London School of Economics)

  • Gavazza, Alessandro

    (London School of Economics)

  • Liu, Lu

    (Imperial College Business School)

  • Ramadorai, Tarun

    (Imperial College Business School)

  • Tripathy, Jagdish

    (Bank of England)

Abstract

Evidence from a range of countries reveals that household inaction in mortgage refinancing can be pervasive despite financial incentives to take action. Inactive households may implicitly cross-subsidise active households, allowing competitive lenders to set lower average mortgage rates. To provide a money-metric assessment of cross-subsidies, we construct a model of household refinancing and structurally estimate it on rich administrative data on the stock of loans in the UK mortgage market in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. The findings over this sample period highlight how the design of household finance markets can contribute to wealth inequality. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.

Suggested Citation

  • Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2021. "Refinancing cross-subsidies in the mortgage market," Bank of England working papers 948, Bank of England.
    • Handle: RePEc:boe:boeewp:0948
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Mortgages; refinancing; cross-subsidies; wealth inequality; household inaction; household finance;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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