Arrears on Mortgages: Differences Across Countries and Their Effect on the Pricing of the Loan

Abstract

The aim of this paper is twofold. Using the Eu-Silc database for seven European countries, we first analyse the frequency of households in arrears in repaying mortgages. By considering only households with mortgages, we uncover some new evidence compared to previous analyses. Although the shares of households in arrears on mortgages calculated on the whole population are low and similar across countries, the findings for households with mortgages show a wider heterogeneity, with the highest percentage of households in arrears in Italy and Spain. The probability of being late in repaying mortgage is lower when education and income are higher and increases when the head of the household is unemployed or in bad health. In the second part of the paper, we assess how much the price of the mortgage is linked to the household specific credit risk, as measured by its predicted probability of being in arrears on mortgage. This analysis regards only Italian households for which the national Eu-Silc database contains some additional variables on the mortgage contract, such as the interest rates. The evidence is that lenders decide the price of the mortgage also on the basis of the household credit scoring. Using a linear model for the estimation of the interest rates and considering mortgages granted since 2002 and 2006, an increase in the probability of default by 0.01 entails a rise in mortgage interest rates by around 12 basis points; in the Us at the end of the '90 Edelberg(2006) finds a higher risk-premium equal to 38 basis points. The impact has increased over time consistently with a more widespread use of credit scoring.

Keywords: mortgage arrears, mortgage interest rates, risk-based pricing

JEL Classification: D10, E43, G21