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Comparing Downpayment and Interest Rate Mortgage Subsidies: An Analytical Approach

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  • Ricardo Bebczuk y Edgardo Demaestri

    (Universidad Nacional de La Plata - BID)

Abstract

Our paper sets up a simple model to assess, for the first time, the relative pros and cons of housing downpayment (DS) and interest rate (IRS) subsidies on the access to and the stability of the mortgage market. Our analysis unveils a number of relevant policy lessons for the design of housing subsidy programs, among them: (a) For fiscal neutrality (same government outlay) to hold, the percentage IRS must be larger than the DS; (b) The IRS raises the loan size a bank is willing to grant, but the DS; (c) When targeting lower income households, the DS is superior to the interest rate subsidy; (d) The DS may increase the probability of default due to this focalization, while the IRS may have the same effect via the increased borrower leverage; and (e) Compared to the IRS, the DS promotes a less aggressive competition in the real estate market.

Suggested Citation

  • Ricardo Bebczuk y Edgardo Demaestri, 2015. "Comparing Downpayment and Interest Rate Mortgage Subsidies: An Analytical Approach," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 61, pages 35-51, January-D.
    • Handle: RePEc:lap:journl:596
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    References listed on IDEAS

    as
    1. Bebczuk,Ricardo N., 2003. "Asymmetric Information in Financial Markets," Cambridge Books, Cambridge University Press, number 9780521793421, October.
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    More about this item

    Keywords

    Mortgage subsidies; subsidy focalization; government subsidies; bank mortgage market.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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