Refinancing Cross-Subsidies in the Mortgage Market

78 Pages Posted: 18 Nov 2021

See all articles by Jack Fisher

Jack Fisher

Independent

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Lu Liu

Imperial College Business School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Jagdish Tripathy

Bank of England

Date Written: November 11, 2021

Abstract

Evidence from a range of countries reveals that household inaction in mortgage refinancing can be pervasive despite financial incentives to take action. Inactive households may implicitly cross-subsidize active households, allowing competitive lenders to set lower average mortgage rates. To provide a money-metric assessment of cross-subsidies, we construct a model of household refinancing and structurally estimate it on rich administrative data on the stock of loans in the U.K. mortgage market in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. The findings over this sample period highlight how the design of household finance markets can contribute to wealth inequality. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.

Keywords: Mortgages, refinancing, cross-subsidies, wealth inequality, household inaction, household finance

JEL Classification: G21, G50, N20, R21, R31, L51, D63

Suggested Citation

Fisher, Jack and Gavazza, Alessandro and Liu, Lu and Ramadorai, Tarun and Tripathy, Jagdish, Refinancing Cross-Subsidies in the Mortgage Market (November 11, 2021). Available at SSRN: https://ssrn.com/abstract=3962433 or http://dx.doi.org/10.2139/ssrn.3962433

Jack Fisher

Independent ( email )

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Lu Liu

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

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

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

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jagdish Tripathy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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