Mortgage Pricing and Monetary Policy

Alessandro Gavazza, Matteo Benetton and Paolo Surico

No 16456, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 U.K., we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as the U.K.'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 pricing and lending, and find that central bank policies increased borrower surplus and lender profits. Moreover, although origination fees allow lenders to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.

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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