Risk-based price of mortgages: An assessment of the loss due to the withdrawal of floor clauses in Spain

Abstract

Purpose

The purpose of this paper is the analysis of the mortgage prices derived from the increase of defaults and the withdrawal of floor clauses in the mortgages offered by banking institutions in Spain. More specifically, this manuscript focuses on the evolution of the spread applied to mortgages contracted with a variable interest rate.

Design/methodology/approach

Two models have been considered to make a proper estimation of the yield curve to assess the loss due to the withdrawal of the floor clauses and quantify the component of the price used to cover the interest rate risk. Two different scenarios have been considered to avoid an underestimation of the aforementioned valuation.

Findings

The authors have shown that the increase in the percentage of doubtful mortgages has led to an increase in the spread of adjustable-rate mortgages. Moreover, the authors have shown that around 40 per cent of spreads are used to cover the interest rate risk.

Originality/value

The main contribution of this manuscript is the quantification of the loss expected by lenders and its impact in the spread. Due to this fact, the loan spread can be disaggregated into a component dependent on the credit risk associated with the borrower, and another component dependent on the interest rate risk to which the lender is exposed.

Citation

Cruz Rambaud, S. and Del Pino Álvarez, M.d.l.Á. (2019), "Risk-based price of mortgages: An assessment of the loss due to the withdrawal of floor clauses in Spain", Journal of European Real Estate Research, Vol. 12 No. 3, pp. 329-344. https://doi.org/10.1108/JERER-04-2019-0012