Uncertainty and Switching in the Mortgage Market

Celine Gondat-Larralde, Bank of England
Frank Strobel, University of Birmingham

Abstract

We examine when it might be optimal for borrowers to switch providers of debt products such as their mortgage, allowing in particular for the role of uncertainty by constructing a stylized real options model of the decision problem involved. We illustrate with numerical examples, and then calibrate the model for the U.K. mortgage market for the period Oct. 1998 to Mar. 2005; significant magnitudes of trigger levels can arise even when standard switching costs are zero, providing an additional, risk-related explanation to the inertia commonly observed in borrowers' product choices.