Mortgage Pricing and Monetary Policy

Matteo Benetton, Alessandro Gavazza and Paolo Surico

No 16456, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper provides novel evidence on lenders' mortgage pricing and how central bank policies affected it. Using the universe of mortgages originated in the UK, we show that lenders seek to price discriminate across heterogeneous borrowers by offering menus of two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as the 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 unconventional monetary policies on mortgage market outcomes, and find that central bank policies boosted aggregate mortgage lending. Moreover, although origination fees allow lenders to price discriminate and capture surplus, banning fees would decrease aggregate mortgage lending.

Keywords: Mortgages; Monetary policy; Price discrimination (search for similar items in EconPapers)
JEL-codes: E52 G51 L11 (search for similar items in EconPapers)
Date: 2021-08
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Related works:
Journal Article: Mortgage Pricing and Monetary Policy (2025)
Working Paper: Mortgage pricing and monetary policy (2025)
Working Paper: Mortgage pricing and monetary policy (2021)
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