Non-Salient Fees in the Mortgage Market

61 Pages Posted: 9 Sep 2019

See all articles by Lu Liu

Lu Liu

Imperial College Business School

Date Written: September 6, 2019

Abstract

This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers.

Keywords: price dispersion, salience, strategic pricing, mortgages

JEL Classification: G21, G41, D12, D14, D18

Suggested Citation

Liu, Lu, Non-Salient Fees in the Mortgage Market (September 6, 2019). Bank of England Working Paper No. 819, September 2019. Available at SSRN: https://ssrn.com/abstract=3449447

Lu Liu (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/l.liu16

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