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

86 Pages Posted: 3 Dec 2020 Last revised: 4 Dec 2020

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

Steven Ongena

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2020

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 variations observed, we distinguish between household 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 household 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 of mortgage-backed securities is more widespread.

Suggested Citation

Albertazzi, Ugo and Fringuellotti, Fulvia and Ongena, Steven R. G. and Ongena, Steven R. G., Fixed Rate versus Adjustable Rate Mortgages: Evidence from Euro Area Banks (November 30, 2020). Swiss Finance Institute Research Paper No. 20-99, Available at SSRN: https://ssrn.com/abstract=3741460 or http://dx.doi.org/10.2139/ssrn.3741460

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

Steven R. G. Ongena (Contact Author)

NTNU Business School ( email )

Norway

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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