The Importance of Income and Housing Wealth Constraints for Future Residential Mobility.

This paper investigates to what extent the mark-up on the lending rate for mortgages depends on expected prepayment. It identifies the effect of the risk of expected prepayment by using a unique dataset of Dutch borrowers insured against default. It is argued that expected prepayment is mainly caused by expected residential mobility of the borrower, which might be due to a change of the value of the collateral or because of a change of income of the borrower. The estimates indicate that lenders require a higher mark-up on the lending rate from households with a lower liquidity constraint, while the collateral constraint has a very limited influence on the mark-up. Thus, it appears that lenders take into account of the possibility that future income shocks may improve the relative position of households in the housing market. [ABSTRACT FROM AUTHOR]