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Fixed rate versus adjustable rate mortgages: evidence from euro area banks

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  • Ugo Albertazzi

    (European Central Bank)

  • Fulvia Fringuellotti

    (University of Zurich)

  • Steven Ongena

    (University of Zurich)

Abstract

Why do some residential mortgages carry a fixed interest rate and others an adjustable rate? To answer this question we studied unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguished between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangled these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread.

Suggested Citation

  • Ugo Albertazzi & Fulvia Fringuellotti & Steven Ongena, 2018. "Fixed rate versus adjustable rate mortgages: evidence from euro area banks," Temi di discussione (Economic working papers) 1176, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1176_18
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    Cited by:

    1. Ahn, Kwangwon & Forsyth, Joetta & Jang, Hanwool & Kim, Dongshin, 2022. "Fixed rate mortgages: The cost of interest rate risk aversion," Finance Research Letters, Elsevier, vol. 44(C).
    2. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    3. Guiso, Luigi & Pozzi, Andrea & Tsoy, Anton & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2022. "The cost of steering in financial markets: Evidence from the mortgage market," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1209-1226.
    4. Giancarlo Corsetti & Joao B. Duarte & Samuel Mann, 2020. "One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area," IMF Working Papers 2020/108, International Monetary Fund.
    5. Peter Hoffmann & Sam Langfield & Federico Pierobon & Guillaume Vuillemey, 2019. "Who Bears Interest Rate Risk?," Review of Financial Studies, Society for Financial Studies, vol. 32(8), pages 2921-2954.

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    More about this item

    Keywords

    mortgages; financial duration; cross-border banks;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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