European Central Bank working paper finds mortgage refinancing lowers households’ marginal propensity to consume and could reduce cash transfer programme costs

The European Central Bank published a working paper examining how mortgage refinancing affects households’ marginal propensity to consume (MPC) and what this implies for fiscal transfers. Using US household microdata, the authors find that MPCs fall in the year of refinancing and remain lower thereafter, consistent with home-equity extraction providing extra liquidity that reduces the consumption response to transitory income shocks. The analysis uses Panel Study of Income Dynamics data for 1999–2021 and defines refinancing as a rise in mortgage balances of more than 5% without a change of residence. The decline in MPC is particularly pronounced for households with lower liquid assets, higher debt-to-income ratios and higher-value illiquid assets. Complementary evidence from Fannie Mae mortgage data suggests refinancing activity is countercyclical, rising in downturns when discretionary cash transfers are often deployed. In a partial-equilibrium life-cycle model, targeted transfers to households that have not recently refinanced are estimated to generate savings of 4% to 12% versus non-targeted programmes, implying around USD 30 billion of potential savings for the CARES Act stimulus payments of March 2020. The paper includes a standard disclaimer that it does not represent the views of the ECB.