Down Payment and Mortgage Rates: Evidence from Equity Loans

49 Pages Posted: 27 Feb 2018

See all articles by Matteo Benetton

Matteo Benetton

University of California, Berkeley - Haas School of Business

Philippe Bracke

Bank of England - Structural Economic Analysis Division; London School of Economics & Political Science (LSE)

Nicola Garbarino

Bank of England

Date Written: February 23, 2018

Abstract

We present new evidence that lenders use down payment size to price unobservable borrower risk. We exploit the contractual features of a UK scheme that helps home buyers top up their down payments with equity loans. We find that a 20 percentage point smaller down payment is associated with a 22 basis point higher interest rate at origination, and a higher ex-post default rate. Lenders see down payment as a signal for unobservable risk, but the relative importance of this signal is limited, as it accounts for only 10% of the difference in mortgage rates between loans with 75% and 95% loan to value ratio.

Keywords: Mortgage design; asymmetric information; leverage; housing policy

JEL Classification: G21; R20; R30

Suggested Citation

Benetton, Matteo and Bracke, Philippe and Garbarino, Nicola, Down Payment and Mortgage Rates: Evidence from Equity Loans (February 23, 2018). Bank of England Working Paper No. 713, Available at SSRN: https://ssrn.com/abstract=3130061 or http://dx.doi.org/10.2139/ssrn.3130061

Matteo Benetton

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Philippe Bracke (Contact Author)

Bank of England - Structural Economic Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Nicola Garbarino

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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