Refinancing Cross-Subsidies in the Mortgage Market

Abstract

In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies that flow from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality.

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

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