Climate Change Risk and the Cost of Mortgage Credit

Abstract

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long term risk, and that attention and beliefs are potential barriers through which SLR risk is priced in residential mortgage markets.

Keywords: bank loans, residential mortgages, climate change risk, sea level rise, securitization

JEL Classification: G21, G22, Q54