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Refinancing cross-subsidies in the mortgage market

Jack Fisher (), Alessandro Gavazza, Lu Liu (), Tarun Ramadorai () and Jagdish Tripathy ()
Additional contact information
Jack Fisher: London School of Economics
Lu Liu: Imperial College Business School
Jagdish Tripathy: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 948, Bank of England working papers from Bank of England

Abstract: Evidence from a range of countries reveals that household inaction in mortgage refinancing can be pervasive despite financial incentives to take action. Inactive households may implicitly cross-subsidise active households, allowing competitive lenders to set lower average mortgage rates. To provide a money-metric assessment of cross-subsidies, we construct a model of household refinancing and structurally estimate it on rich administrative data on the stock of loans in the UK mortgage market in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. The findings over this sample period highlight how the design of household finance markets can contribute to wealth inequality. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.

Keywords: Mortgages; refinancing; cross-subsidies; wealth inequality; household inaction; household finance (search for similar items in EconPapers)
JEL-codes: D63 G21 L51 N20 R21 R31 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2021-11-05
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-eur and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0948

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