Value of information, search, and competition in the UK mortgage market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 March 2022

Staff Working Paper No. 967

By Mateusz Myśliwski and May Rostom

We formulate a structural model of search with lender and borrower heterogeneity to estimate the value of information provided to UK households by mortgage brokers. Using administrative data on loans originating in 2016 and 2017, we document the existence of a substantial degree of unexplained price dispersion, and observe that while mortgages obtained from brokers are cheaper, borrowers who use intermediaries pay more once commissions are factored in. Assuming that borrowers with high search costs are more likely to use brokers, we nonparametrically estimate the distributions of search, and the banks' costs of providing these loans. Our results show that search costs vary by demographic groups, and that broker presence exerts negative pressure on lenders’ market power. Compared to a world where broker advice is unavailable, we estimate their presence reduces average monthly mortgage costs by 21%, and welfare losses arising from search frictions by 70% – although the results differ by borrower and loan characteristics. We also find that regulation in support of market centralization halves lenders’ markups and lowers monthly costs of an average mortgage by 4.4%.

Value of information, search, and competition in the UK mortgage market

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