Refinancing Cross-Subsidies in the UK Mortgage Market

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Abstract/Contents

Abstract: Household inaction in mortgage refinancing is pervasive despite financial incentives to take action. Inactive households implicitly cross-subsidize active households, allowing competitive lenders to set lower average mortgage rates. To provide a money-metric assessment of this cross-subsidy, we build a model of household refinancing behaviour and structurally estimate it on rich administrative data on the stock of loans in the U.K. mortgage market, an institutional setting well-suited to this calculation. The model and data reveal the existence of sizeable cross-subsidies, and reveal that cross-subsidies flow from relatively poorer households and those located in less-wealthy areas towards households that are richer and located in wealthier areas. These findings highlight how the design of household finance markets can contribute to wealth and income inequality.

Type of resource	text
Date created	August 26, 2021

DOI	https://doi.org/10.25740/dd773mw2857
Location	https://purl.stanford.edu/dd773mw2857

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License: This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).

Preferred citation: Fisher, J., Gavazza, A., Liu, L., Ramadorai, T., and Tripathy, J. (2022). Refinancing Cross-Subsidies in the UK Mortgage Market. Stanford Digital Repository. Available at https://purl.stanford.edu/dd773mw2857

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