Disentangling the Effects of Household Financial Constraints and Risk Profile on Mortgage Rates
47 Pages Posted: 5 May 2015 Last revised: 29 Mar 2016
Date Written: May 4, 2015
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: Suggested Citation