The Hidden Cost of Climate Risk: How Rising Insurance Premiums Affect Mortgage, Relocation, and Credit *

Abstract

As climate change exacerbates natural disasters, homeowners' insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers' mortgage, relocation, and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment. The prepayment effect is mainly driven by relocation. Movers with larger pre-moving premium increases achieve lager premium reductions. The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present across GSE and non-GSE mortgages. Beyond mortgages, higher premiums also increase credit card delinquency and deteriorate borrower creditworthiness. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system.

Keywords: JEL Classification: G21, G22, G5, G52, G53, R21, Q54, D14, R3 climate risk, insurance, mortgage, delinquency, prepayment, relocation, credit card, creditworthiness

JEL Classification: G21, G22, G5, G52, G53, R21, Q54, D14, R3