Fixed come hell or high water? Selection and prepayment of fixed rate mortgages outside the US

Nimesh Patel and Toby Daglish

No 19215, Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation

Abstract: We examine the decision to prepay a fixed rate mortgage in the UK Canada Ireland Australia and New Zealand. These countries are characterised by having substantial fees which are associated with breaking a fixed rate mortgage. We develop a model which allows for fluctuations both in banks' wholesale rates and credit spreads. We find that households can achieve economically significant benefits both from following an optimal prepayment strategy contingent on the break fee used by their bank and also by selection of fixed interest rate term and (where available) break fee structure.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwcsr:19215

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