Who Can Refinance? The Possibilities and Limitations of Market-based Refinancing in the Case of Mortgages with a Variable Interest Rate

Abstract

In our study we examine what portion of variable interest rate mortgages can be profitably and realistically refinanced on a market basis, in the light of remaining maturity, the current one-off costs of refinancing and the prevailing interest rate spread. To that end, relying on microdata we applied various methods (from using the simple banking sector average spread to applying a linear regression model) to estimate the interest rate spread at which debtors would be able to take out a new, variable-rate loan. If the estimated spread of the new loan is adequately low, refinancing may be a financially rewarding option for the debtor. According to our results, 22–31 per cent of the variable interest rate mortgage loans disbursed prior to 2015 could be refinanced in this way assuming conservative lending conditions. Although we focused on the refinancing of variable-rate loans with other variablerate loans directly, our results also indicate that on a market basis, there may be limited room for refinancing variable-rate loans with fixed-rate loans and hence, for mitigating the interest rate risk of the household sector. In our opinion, by easing the obstacles to loan refinancing, the recommendation of the Magyar Nemzeti Bank on interest rate risk may considerably raise the share of debtors switching to fixed-rate loans.