Skip to main content
Swiss Journal of Economics and Statistics
Download PDF

The Exposure of Mortgage Borrowers to Interest Rate Risk and House Price Risk — Evidence from Swiss Loan Application Data

Swiss Journal of Economics and Statistics volume 151, pages 89–123 (2015)Cite this article

Summary

We study the exposure of mortgage borrowers in Switzerland to interest rate and house price risks and examine how the households' choice of risky mortgages is related to individual interest rate expectations and risk-aversion. Our analysis is based on a unique data set of household mortgage applications from September 2012 until January 2014. Our assessment of risk exposure among mortgage borrowers in Switzerland is highly sensitive to the underlying assumptions on mortgage costs, household income and house value. Our main results suggest that the exposure of mortgage borrowers to interest rate and house price risks is limited in the medium term. We further document that the choice of mortgage contract seems to be more influenced by affordability concerns than risk concerns. In particular, individual interest rate expectations hardly affect mortgage contract choice.

References

  • Aregger, Nicole, Martin Brown, and Enzo Rossi (2013), “Transaction Taxes, Capital Gains Taxes and House Prices”, Swiss National Bank Working Paper 2013–2.

    Google Scholar 

  • Badarinza, Cristian, John Campbell, and Tarun Ramadorai (2013), “What Calls to ARMS? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages”, Working Paper.

    Google Scholar 

  • Basten, Christoph, and Catherine Koch (2014), “House Prices, Mortgage Demand and Mortgage Supply: Causal Evidence from a Shift-Share Experiment”, Working Paper, University of Zurich.

    Google Scholar 

  • Brown, Martin, and Matthias Hoffmann (2013), “Mortgage Relationships”, University of St. Gallen Working Papers on Finance 2013/10.

    Google Scholar 

  • Campbell, John, and Joao Cocco (2003), “Household Risk Management and Optimal Mortgage Choice”, Quarterly Journal of Economics 118, pp. 1449–1494.

    Article  Google Scholar 

  • Coulibaly, Brahima, and Geng Li (2009), “Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances”, Real Estate Economics 37, pp. 659–673.

    Article  Google Scholar 

  • Damen, Sven, and Erik Buyst (2013), “The Myopic Choice between Fixed and Adjustable Rate Mortgages in Flanders”, Working Paper.

    Google Scholar 

  • Degen, Kathrin, and Andreas Fischer (2010), “Immigration and Swiss House Prices”, Swiss National Bank Working Paper 2010–16.

    Google Scholar 

  • Demyanyk, Yuliya, and Otto Van Hemert (2009), “Understanding the Subprime Mortgage Crisis”, Review of Financial Studies 24, pp. 1848–1880.

    Article  Google Scholar 

  • Ehrmann, Michael, and Michael Ziegelmeyer (2014), “Household Risk Management and Actual Mortgage Choice in the Euro Area”, ECB Working Paper 1631.

    Google Scholar 

  • Elmer, Peter, and Steven Seelig (1999), “Insolvency, Trigger Events, and Consumer Risk Posture in the Theory of Single-Family Mortgage Default”, Journal of Housing Research 10, pp. 1–25.

    Google Scholar 

  • Elul, Ronel, Nicholas Souleles, Souphala Chomsisengphet, Dennis Glennon, and Robert Hunt (2010), “What ‘Triggers’ Mortgage Default?”, American Economic Review: Papers & Proceedings 100, pp. 490–494.

    Article  Google Scholar 

  • Ghent, Andra, and Marianna Kudlyak (2011), “Recourse and Residential Mortgage Default: Evidence from US States”, Review of Financial Studies 24, pp. 3139–3186.

    Article  Google Scholar 

  • Guiso, Luigi, Paola Sapienza, and Luigi Zingales (2013), “The Determinants of Attitudes toward Strategic Default on Mortgages”, Journal of Finance 68, pp. 1473–1515.

    Article  Google Scholar 

  • IMF (2012), “Spain: Vulnerabilities of Private Sector Balance Sheets and Risks to the Financial Sector Technical Notes”, IMF Country Report No. 12/140.

    Google Scholar 

  • Johnson, Kathleen, and Geng Li (2011), “Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?”, Working Paper.

    Google Scholar 

  • Mccarthy, Yvonne, and Kieran Mcquinn (2011), “How Are Irish Households Coping with their Mortgage Repayments? Information from the Survey on Income and Living Conditions”, The Economic and Social Review 42(1), pp. 71–94.

    Google Scholar 

  • Mullainathan, Sendhil, Markus Noeth, and Antoinette Schoar (2012), “The Market for Financial Advice: An Audit Study”, NBER Working Paper 17929.

    Book  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of St.Gallen, Rosenbergstrasse 52, CH-9000, St.Gallen, Switzerland

    Martin Brown & Benjamin Guin

Authors
  1. Martin Brown
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Benjamin Guin
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Martin Brown.

Rights and permissions

Open Access  This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made.

The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

To view a copy of this licence, visit https://creativecommons.org/licenses/by/4.0/.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Brown, M., Guin, B. The Exposure of Mortgage Borrowers to Interest Rate Risk and House Price Risk — Evidence from Swiss Loan Application Data. Swiss J Economics Statistics 151, 89–123 (2015). https://doi.org/10.1007/BF03399414

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF03399414

Keywords