Fixed Rate Versus Adjustable Rate Mortgages: Evidence from Euro Area Banks

75 Pages Posted: 12 Jul 2018 Last revised: 17 Aug 2019

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Fulvia Fringuellotti

University of Zurich - Department of Banking and Finance; Swiss Finance Institute, Students

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: August 16, 2019

Abstract

Why do residential mortgages carry a fixed or an adjustable interest rate? To answer this question we study unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variation observed, we distinguish between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangle these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and mortgage-backed securities is more widespread.

Keywords: mortgages, financial duration, cross-border banks

JEL Classification: F23, G21, G41

Suggested Citation

Albertazzi, Ugo and Fringuellotti, Fulvia and Ongena, Steven R. G., Fixed Rate Versus Adjustable Rate Mortgages: Evidence from Euro Area Banks (August 16, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1176. Available at SSRN: https://ssrn.com/abstract=3210730 or http://dx.doi.org/10.2139/ssrn.3210730

Ugo Albertazzi (Contact Author)

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Fulvia Fringuellotti

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute, Students ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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