Reference Points in Refinancing Decisions

51 Pages Posted: 1 Oct 2019 Last revised: 14 Nov 2019

See all articles by Virginia Gianinazzi

Virginia Gianinazzi

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Date Written: September 26, 2019

Abstract

This paper shows that households’ mortgage refinancing decisions suboptimally depend on uninformative reference points, imposing a friction to the refinancing channel of monetary policy. I study refinancing behavior in the UK, where on pre-determined dates initial fixed rates reset and mortgagors automatically move onto a reversion rate above market rates. A borrower’s expired fixed rate determines whether failing to refinance is perceived as a loss or as a gain, thus serving as a salient reference point. I find that borrowers for whom inaction implies a relative gain refinance on average 13.4% less than borrowers who face a loss. This evidence is at odds with optimal models of refinancing since future borrowing costs are unrelated to past rates.

Keywords: reference points, mortgage refinancing, household finance, interest rate pass-through, monetary policy

JEL Classification: G02, G11, G21, G51, R21, R31

Suggested Citation

Gianinazzi, Virginia, Reference Points in Refinancing Decisions (September 26, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3459872 or http://dx.doi.org/10.2139/ssrn.3459872

Virginia Gianinazzi (Contact Author)

Università della Svizzera italiana (USI), Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute ( email )

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

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