Down payment and mortgage rates: evidence from equity loans

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 23 February 2018

Working paper No. 713
By Matteo Benetton, Philippe Bracke and Nicola Garbarino

We present new evidence that lenders use down payment size to price unobservable borrower risk. We exploit the contractual features of a UK scheme that helps home buyers top up their down payments with equity loans. We find that a 20 percentage point smaller down payment is associated with a 22 basis point higher interest rate at origination, and a higher ex-post default rate. Lenders see down payment as a signal for unobservable risk, but the relative importance of this signal is limited, as it accounts for only 10% of the difference in mortgage rates between loans with 75% and 95% loan to value ratio.

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