Mortgage Choice Determinants: The Role of Risk and Bank Regulation

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 e ects on the choice between variable-rate mortgages (VRMs) and other mort- gages with reduced initial payments. We nd 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 nd that the Basel capital discounts based on LTV ratios divide otherwise similar borrowers in their mortgage choices.