Cost versus availability of loans: which matters more for mortgagors?

Alexandra Varadi

In early 2000s, mortgage debt increased rapidly relative to income.  A key driver of this was an expansion in credit supply that made credit cheaper and more widely available. But, it is largely unknown if it is the cost of borrowing or the availability of loans that matters more for mortgagors. I examine this question in a recent paper. I find that increasing loan availability, notably at high loan to value (LTV) or high loan to income (LTI) ratios, increases household borrowing and improves credit access. The cost of borrowing matters too. It is a strong determining factor for mortgagors closer to borrowing limits, and for middle-aged borrowers. And, reducing borrowing costs in tandem with higher loan availability strongly amplifies mortgage borrowing.

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