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Mortgage Choice Determinants: The Role of Risk and Bank Regulation
Author(s) -
Dungey Mardi,
Doko Tchatoka Firmin,
Wells Graeme,
Yanotti María B.
Publication year - 2015
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12205
Subject(s) - mortgage underwriting , capital requirement , shared appreciation mortgage , loan , capital (architecture) , economics , business , monetary economics , mortgage insurance , balance sheet , actuarial science , finance , microeconomics , history , archaeology , casualty insurance , incentive , insurance policy
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.