Reference Points in Refinancing Decisions

Category: Finance Brown Bag Seminar
When: 11 December 2019
, 14:00
 - 15:00
Where: HoF E.20 ("DZ Bank")
Speaker: Virginia Gianinazzi

Authors: Virginia Gianinazzi (Università della Svizzera italiana and Swiss Finance Institute)

Title: Reference Points in Refinancing Decisions

Abstract: This paper shows that households’ mortgage refinancing decisions sub-optimally depend on uninformative reference points, imposing a friction to the refinancing channel of monetary policy. I study refinancing behavior in the UK, where on pre-determined dates initial fixed rates reset and mortgagors automatically move onto a reversion rate above market rates. A borrower’s expired fixed rate determines whether failing to refinance is perceived as a loss or as a gain, thus serving as a salient reference point. I find that borrowers for whom inaction implies a relative gain refinance on average 13.4% less than borrowers who face a loss. This evidence is at odds with optimal models of refinancing since future borrowing costs are unrelated to past rates.