Disentangling the Effects of Household Financial Constraints and Risk Profile on Mortgage Rates

47 Pages Posted: 5 May 2015 Last revised: 29 Mar 2016

See all articles by Santiago Carbo-Valverde

Santiago Carbo-Valverde

Bangor Business School; Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Sergio Mayordomo

Banco de España

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History

Multiple version iconThere are 2 versions of this paper

Date Written: May 4, 2015

Abstract

In this paper we disentangle the impact of household financial constraints on the mortgage rate from a number of dimensions of credit risk. The constraints employed in our analysis depend on the desired home value and not on the purchase price, as otherwise constraints would be specific to homeowners, whereas we deal with renters and owners through the Heckman selection model. This analysis relies on a dataset that contains information on the economic and financial decisions of Spanish households in four different years: 2002, 2005, 2008, and 2011. Our results suggest that banks’ profitable customers are able to bargain for lower mortgage rates. However, contrary to other studies, the risk profile does not have a significant effect on interest rates. Credit institutions tend to charge higher rates during the crisis to all customers, irrespective of their risk profiles.

Keywords: mortgages, financial constraints, credit risk

JEL Classification: G21, R21

Suggested Citation

Carbo-Valverde, Santiago and Mayordomo, Sergio and Rodriguez-Fernandez, Francisco, Disentangling the Effects of Household Financial Constraints and Risk Profile on Mortgage Rates (May 4, 2015). Available at SSRN: https://ssrn.com/abstract=2602204 or http://dx.doi.org/10.2139/ssrn.2602204

Santiago Carbo-Valverde

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History ( email )

Granada
Spain

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