The Exposure of Mortgage Borrowers to Interest Rate Risk, Income Risk and House Price Risk – Evidence from Swiss Loan Application Data

40 Pages Posted: 21 May 2015

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Benjamin Guin

Bank of England

Date Written: December 2, 2014

Abstract

We study the exposure of mortgage borrowers in Switzerland to interest rate, income and house price risks and examine how the households’ choice of risky mortgages is related to individual interest rate expectations and risk-aversion. Our analysis is based on a unique data set of household mortgage applications from September 2012 until January 2014. Our assessment of risk exposure among mortgage borrowers in Switzerland is highly sensitive to the underlying assumptions on mortgage costs, household income and house value. Our main results suggest that the exposure of mortgage borrowers to interest rate and house price risks is limited in the medium-term. We further document that the choice of mortgage contract seems to be more influenced by affordability concerns than risk concerns. In particular, individual interest rate expectations hardly affect mortgage contract choice.

Keywords: Mortgage Default, Mortgage Choice, Household Finance, Mortgage Risk

JEL Classification: G21, D14, R21, R31

Suggested Citation

Brown, Martin and Guin, Benjamin, The Exposure of Mortgage Borrowers to Interest Rate Risk, Income Risk and House Price Risk – Evidence from Swiss Loan Application Data (December 2, 2014). University of St.Gallen, School of Finance Research Paper No. 2015/9. Available at SSRN: https://ssrn.com/abstract=2608823 or http://dx.doi.org/10.2139/ssrn.2608823

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Benjamin Guin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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