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Showing posts from February, 2013

Some (un)intended consequences of mortgage refinancing

As mortgage rates are decreasing and households take on mortgages with lower rates there are several consequences, not all of them obvious. The amount of interest paid, C.P goes down which at first glance is a good thing. The consumer now has the option to allocate the difference between the old and the new payment to other purposes. The downside of lower payments is that somebody else is now receiving less, and likely that somebody else is a pension fund, life Insurance Company or another entity which needs long dated cash flows. Chances are that as the homeowner refinances the NPV of his/her pension or insurance decreases at the same time. The economic effect of the increased cash flows to the household sector and the decreased cash flows to pension funds, life insurance companies et al . is not symmetrical because the household sector has a high marginal propensity to consume – they spend most of the savings – whereas the financial savings institutions buy financial assets (in