Mortgage pricing and monetary policy

Benetton, M, Gavazza, A and Surico, P (2021) Mortgage pricing and monetary policy. Working Paper. Bank of England. OPEN ACCESS

Abstract

This paper provides novel evidence on lenders’ mortgage pricing and on how central bank operations affected it. Using the universe of mortgages originated in the UK, we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as UK’s Funding for Lending Scheme, lenders decreased interest rates and increased origination fees. To understand lenders’ pricing strategies and their effects on market equilibrium, we develop and estimate a structural discrete-continuous model of mortgage demand and lender competition in which borrowers may have different sensitivities to rates and fees. We use the estimated model to decompose the effects of central bank unconventional monetary policy on mortgage pricing and lending, finding that central bank operations increased borrower surplus and lender profits. Moreover, although origination fees allow lender to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.

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Item Type: Monograph (Working Paper)
Subject Areas: Economics
Additional Information:

Alessandro Gavazza and Paolo Surico gratefully
acknowledge financial support from the European Research Council under the Grant Agreements No. 771004

Funder Name: European Research Council
Date Deposited: 10 Sep 2021 09:00
Date of first compliant deposit: 10 Sep 2021
Last Modified: 15 Oct 2021 12:05
URI: https://lbsresearch.london.edu/id/eprint/1951
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