Down payment and mortgage rates: evidence from equity loans

Matteo Benetton (), Philippe Bracke and Nicola Garbarino
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Matteo Benetton: London School of Economics, Postal: London School of Economics

No 713, Bank of England working papers from Bank of England

Abstract: We present new evidence that lenders use down payment size to price unobservable borrower risk. We exploit the contractual features of a UK scheme that helps home buyers top up their down payments with equity loans. We find that a 20 percentage point smaller down payment is associated with a 22 basis point higher interest rate at origination, and a higher ex-post default rate. Lenders see down payment as a signal for unobservable risk, but the relative importance of this signal is limited, as it accounts for only 10% of the difference in mortgage rates between loans with 75% and 95% loan to value ratio.

Keywords: Mortgage design; asymmetric information; leverage; housing policy (search for similar items in EconPapers)
JEL-codes: G21 R20 R30 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2018-02-23
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0713

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