Regional Differences in Mortgage Lending Conditions in the UK

This paper presents empirical evidence of regional variations in mortgage lending conditions within the UK’s mortgage sector. This is an important question because mortgages constitute a major part of households’ liabilities and financial institutions’ assets, demonstrating potential to destabilise the financial system and economy in whole. So far, in spite of its importance, research on residential debt lacks a broader cross country insight on various mortgage market issues. The important point is that regional variations in incomes, house prices and employment rates may have generated a regional dimension in mortgage lending conditions, having different impacts in various regions according to the pattern of distribution of more risky mortgage contracts. This paper addresses the question of regional differentiation in lending conditions linked with mortgage contract choice decisions. The empirical estimation takes the form of a three-stage simultaneous equations model and investigates the regional dimension of mortgage lending conditions by inclusion of regional dummies and regionally differentiated variables in econometric estimates. Cross-sectional estimations employ data extracted from the British Household Panel Survey and Understanding Society Survey Data, covering the period from 2007 to 2014. This periodical frame includes the start of the financial crisis, presenting an opportunity to acquire a deeper understanding of how households’ mortgage choice decisions have altered following economic changes. Empirical findings suggest regional deviations in loan to value ratios and mortgage rates within the UK’s mortgage market. Policy implications may include the need for the enforcement of regional considerations in governmental mortgage affordability programmes.