Working Paper: CEPR ID: DP18478
Authors: Jamie Coen; Anil K Kashyap; May Rostom
Abstract: We characterize the large number of mortgage offers for which people qualify in the United Kingdom. Very few pick the cheapest option, nonetheless the one selected is not usually noticeably more expensive. A few borrowers make very expensive choices. These are most common when the menu they face has many expensive options, and are most likely for high loan-to-value and loan-to-income borrowers. Young people and first-time buyers are more prone to making expensive choices. The dispersion in the mortgage menu is consistent with banks price discriminating for borrowers who might pick poorly, while competing for others who shop more effectively.
Keywords: Price Discrimination; Mortgages
JEL Codes: G21; G51; G53; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banks price discriminate based on borrower characteristics (G21) | Borrowers with high LTV and LTI ratios face menus with a higher proportion of expensive mortgage options (G21) |
| Borrowers with high LTV and LTI ratios (G21) | More prone to making costly choices due to poor quality of mortgage menus (D91) |
| Poor quality of mortgage menus (G21) | Leads to making costly choices (D91) |
| Customers focusing on low fees (G29) | Choose mortgages with high initial rates (G21) |
| High price dispersion (D49) | Customers select particularly expensive mortgages (G21) |