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Mortgage Choice with Multiple Fixation Periods: Evidence from German Mortgage Borrowers

Author

Listed:
  • Oliver Lerbs
  • Martin Weber
  • Ulrich Seubert

Abstract

This paper studies private households’ mortgage choice under multiple possible interest fixation periods using a large loan-level data set from the German market. We contrast theoretical predictions of rational choice among adjustable-rate mortgages (ARM) and fixed-rate mortgages (FRM) with actual behavior across different borrower types within a multinomial probit framework. We find a significant influence of the alternative-specific yield spread and relative pricing of a fixation period compared to the aggregate market. In line with risk management considerations, we also show that borrower characteristics matter: borrowers who take on larger loans, are more risk averse and have lower expected mobility are more likely to opt for longer fixation periods. We finally present evidence that borrowers’ choice is altered by mortgage brokers’ advice in a way that may be suboptimal for households.

Suggested Citation

  • Oliver Lerbs & Martin Weber & Ulrich Seubert, 2016. "Mortgage Choice with Multiple Fixation Periods: Evidence from German Mortgage Borrowers," ERES eres2016_246, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2016_246
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    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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