REGULATION, FORMAL AND INFORMAL ... - ResearchGate

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similar to those reported in Borio (1996) for 1993, indicating that the renegotiability of
interest rates in mortgage markets follows specific national patterns. In the United States
more than three quarters of mortgages are at fixed rates, but this is substantially influenced
by the fact that early repayment is generally possible without penalty. Differences in the
weight of variable interest rates for consumer credit are less evident: one quarter of total
consumer credit in Italy is at variable rate, against 27 per cent in the euro area.
Transaction and switching costs have been rapidly reduced in Italy: down payment and
early repayment costs are now in line with those applied in other banking systems.
Down payment. The cost of a loan depends not only on interest rates and commissions but
also on collateral requirements. In recent years, in Italy the loan-to-value ratio (LTV) has
rapidly increased. In the seventies the maximum LTV for a mortgage was set by regulation
at 50 per cent; in the eighties regulation progressively eased and the maximum LTV ratio
reached an average value of 56 per cent (Jappelli and Pagano, 1994). In 1995 the maximum
LTV ratio was raised at 80 per cent (Interministerial Credit Committee resolution of 22 April
1995). Currently, this requirement is often accommodated in such a way that LTV can
exceed 80 per cent and be as high as the market value of the house. In this case additional
guarantees are requested.
In spite of these changes, down payments in Italy still remain relatively large by
international standards (Mercer Oliver Wyman, 2003). In 2001, the typical LTV ratio ranged
from a low of 55 percent in Italy to a high of 90 percent in the Netherlands (Figure A2); in
Germany, the United Kingdom and Spain it was intermediate (67 to 70 per cent). The high
Dutch LTV partly reflects tax incentives. It is worth noting that in Denmark and Germany,
though LTV is relatively low, the constraint can often be accommodated by using a
secondary loan, so that cap lending can be as high as 80 to100 per cent of the market value
of the house. The typical mortgage maturity is positively correlated with the loan-to-value
ratio, averaging 15 years in Italy, for example, and 30 years in the Netherlands.
Early repayments. In Italy early repayment of a mortgage is possible but at a high cost, so
that in practice few consumers exercise the option. Borio (1996) argues that this feature is
shared by the vast majority of industrialized countries. At the two extremes are Austria,
where early repayment is virtually impossible, and Denmark and United States, where it is
cost-free. This means that the relatively high share of long-term and fixed-rate financing in