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Interrupting inertia: evidence from a mortgage refinancing field trial

Author

Listed:
  • Byrne, Shane

    (Central Bank of Ireland)

  • Devine, Kenneth

    (Central Bank of Ireland)

  • McCarthy, Yvonne

    (Central Bank of Ireland)

Abstract

A widespread tendency for mortgage holders to forego opportunities to reduce their repayment burden through refinancing has been well documented. This puzzle has persisted in spite of considerable regulatory and public attention to the topic. In this Letter, we conduct a randomised controlled trial on a sample of circa 12,000 mortgage holders to test how targeted enhancements to an existing disclosure can prompt greater take-up of advantageous refinancing opportunities. The results show the best performing enhancement delivered a 76 per cent increase in the number of refinances completed, when compared against the pre-existing standard disclosure. Refinancers benefit materially, saving on average €1,209 just within the first 12 months after action. We observe that reminders substantially drive the increased uptake, and that the incorporation of personalised euro savings estimates as part of the menu of refinancing options presented to consumers can also help them to more easily weigh-up their opportunities and make the best informed choices . These results demonstrate the value of integrating behavioural economics into consumer protection policymaking.

Suggested Citation

  • Byrne, Shane & Devine, Kenneth & McCarthy, Yvonne, 2022. "Interrupting inertia: evidence from a mortgage refinancing field trial," Economic Letters 9/EL/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:9/el/22
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    References listed on IDEAS

    as
    1. Byrne, Shane & Devine, Kenneth & McCarthy, Yvonne, 2020. "Room to improve: a review of switching activity in the Irish mortgage market," Economic Letters 12/EL/20, Central Bank of Ireland.
    2. Lunn, Pete & McGowan, F idhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78.
    3. Byrne, Shane & Devine, Kenneth & McCarthy, Yvonne, 2022. "Behavioural Economics and Public Policy-Making," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-103, January.
    4. Giordana, Gastón & Ziegelmeyer, Michael, 2020. "Stress testing household balance sheets in Luxembourg," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 115-138.
    5. Devine, Kenneth, 2022. "Refinancing Inertia in the Irish Mortgage Market," Research Technical Papers 5/RT/22, Central Bank of Ireland.
    6. Hastings, Justine & Mitchell, Olivia S., 2020. "How financial literacy and impatience shape retirement wealth and investment behaviors," Journal of Pension Economics and Finance, Cambridge University Press, vol. 19(1), pages 1-20, January.
    7. Steffen Andersen & John Y. Campbell & Kasper Meisner Nielsen & Tarun Ramadorai, 2020. "Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market," American Economic Review, American Economic Association, vol. 110(10), pages 3184-3230, October.
    8. Bajo, Emanuele & Barbi, Massimiliano, 2018. "Financial illiteracy and mortgage refinancing decisions," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 279-296.
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