Till Mortgage Do Us Part: Refinancing Costs and Household’s Bank Switching
50 Pages Posted: 5 Feb 2016 Last revised: 14 Dec 2017
Date Written: October 2017
We show that the mortgage refinancing costs, which serve as a “lock-in” for mortgage holders, play an important role in household’s decision to switch a bank. To this end, we use a unique household panel dataset that enables us to infer individual bank switching, in conjunction with a legal reform that exogenously slashed down the mortgage refinancing costs. We find that the households responded to this change by increasingly changing their main bank to refinance or prepay an existing mortgage loan (switching with a mortgage), as well as to take out a mortgage (switching for a mortgage). Dissecting these results, we show that the effects of the reform were not uniform across households. The more educated households, those residing in ex-ante less competitive markets, or in the markets where relationship banking is relatively weaker were at the forefront of the wave of bank switching.
Keywords: bank switching, mortgage refinancing costs, switching costs, natural experiment
JEL Classification: G21; D14
Suggested Citation: Suggested Citation