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The Value of Mortgage Choice: Payment Structure and Contract Length

Author

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  • Michael Boutros
  • Nuno Clara
  • Katya Kartashova

Abstract

We study how households choose between three mortgage contracts with different payment structures: fixed-rate fixed-payment, variable-rate variable-payment, and a hybrid variable-rate fixed-payment mortgage where interest rate changes affect principal repayment rather than payment size. This hybrid contract, which is offered in only a few countries around the world, gives households additional flexibility to insure against payment risk while exposing them to the risk of larger future mortgage balances. We model these mortgage types simultaneously and show that welfare is substantially improved when all three contracts are available for households to choose from. Our calibrated model matches mortgage choice patterns in Canada, where all these options are offered with short terms. We demonstrate that restricting contract choice or mandating long terms, as in the U.S. system, can lead to substantial welfare losses by limiting risk management strategies and increasing mortgage pricing ex-ante.

Suggested Citation

  • Michael Boutros & Nuno Clara & Katya Kartashova, 2026. "The Value of Mortgage Choice: Payment Structure and Contract Length," Staff Working Papers 26-2, Bank of Canada.
    • Handle: RePEc:bca:bocawp:26-2
    DOI: 10.34989/swp-2026-2
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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