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Uncovering Our Self-Imposed Limits: Changes in Loan-to-Value and The Mortgage Market

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  • Daniel Oda
  • Fernando Sepúlveda

Abstract

We analyze the possible effects of eventual changes in regulatory limits to the loan-to-value ratio (LTV) for residential mortgage loans in Chile. In Chile there are three major types of mortgage loans, but the market is concentrated in the type without regulatory limits to the LTV. However, most mortgage loans are still granted in the 80%-90% LTV range, suggesting that a “no money down” credit policy is infrequent in residential mortgages. Our analysis allows us to infer that a nonnegligible fraction of mortgage loans are paired with an unsecured consumer loan to finance their down payment. This implies not only to a higher effective interest rate, but also a significantly higher financial burden during the first few years of the mortgage. Thus, imposing such a constraint on the LTV ratio could prove riskier than expected. Given that even in the absence of restrictions we encounter these unsecured bridge loans, this practice may be exacerbated upon imposing regulatory limitations. Finally, assuming an inelastic supply for residential mortgage loans we estimate that imposing an 80% LTV ceiling would increase the cost of credit by 17-26 basis points and weaken the loan growth rate by 40 basis points, approximately. Complementing LTV restrictions with policies that restrict the use of bridge loans is important if this tool is to be used to limit the buildup of financial risk.

Suggested Citation

  • Daniel Oda & Fernando Sepúlveda, 2014. "Uncovering Our Self-Imposed Limits: Changes in Loan-to-Value and The Mortgage Market," Working Papers Central Bank of Chile 737, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:737
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    References listed on IDEAS

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    1. Deniz O Igan & Heedon Kang, 2011. "Do Loan-To-Value and Debt-To-Income Limits Work? Evidence From Korea," IMF Working Papers 11/297, International Monetary Fund.
    2. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    3. Alejandro Jara & Carmen Gloria Silva, 2007. "Metodología de la Encuesta sobre Condiciones Generales y Estándares en el Mercado de Crédito Bancario," Economic Statistics Series 57, Central Bank of Chile.
    4. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
    5. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    6. Kenneth Kuttner & Ilhyock Shim, 2012. "Taming the Real Estate Beast: The Effects of Monetary and Macroprudential Policies on Housing Prices and Credit," RBA Annual Conference Volume,in: Alexandra Heath & Frank Packer & Callan Windsor (ed.), Property Markets and Financial Stability Reserve Bank of Australia.
    7. Mauricio Calani C. & Pablo García S. & Daniel Oda Z., 2010. "Supply and Demand Identification in the Credit Market," Working Papers Central Bank of Chile 571, Central Bank of Chile.
    8. Chris Bloor & Chris McDonald, 2013. "Estimating the impacts of restrictions on high LVR lending," Reserve Bank of New Zealand Analytical Notes series AN2013/05, Reserve Bank of New Zealand.
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