Mortgage Choice Determinants: The Role of Risk and Bank Regulation

Mardi Dungey, Firmin Doko Tchatoka, Graeme Wells and María B. Yanotti

The Economic Record, 2015, vol. 91, issue 295, 417-437

Abstract: type="main" xml:id="ecor12205-abs-0001">

We shed new light on the role of borrower characteristics in mortgage product choice, and how these are impacted by regulatory capital requirements. Using rich loan-level data from the Australian market, we analyse the borrower idiosyncratic risk effects on the choice between variable-rate mortgages and other mortgages with reduced initial payments. We find that income, wealth and mobility risks play a role in product choice. We investigate regulatory capital requirements in a market where banks hold mortgage risk on balance sheet and find that the Basel capital discounts based on loan-to-valee ratios divide otherwise similar borrowers in their mortgage choices.

Date: 2015
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