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Abstract
This paper examines how lenders’ past experiences with house price changes influence the mortgage rates they charge, focusing on the role of lender expectations. I hypothesize that lenders extrapolate from past house price changes to balance profit margins with default risk, offering lower rates when they anticipate future price increases. Consistent with this hypothesis, I show that lenders exposed to greater house price growth tend to charge lower mortgage rates. I rule out alternative explanations, such as differential local growth opportunities or the potential of banks to influence local prices, using placebo tests and geographic variation in lending patterns. Specifically, I find that moving from the 25th to the 75th percentile of price growth exposure is associated with a 4.5 percentage point reduction in loan rate spreads.