Mortgage loan rates and the defaults of variable rate mortgages

Emil Bandoni, Barbara Jarmulska and Friederike Fourné

No 3112, Working Paper Series from European Central Bank

Abstract: Using a granular database of variable rate euro area loans and analysing their defaults between 2014 and 2019, we show that the effect of interest rate changes on mortgage defaults is highly non-linear. First, we find that the risk associated with higher contemporaneous interest rates is concentrated among borrowers who got the loan at ultra-low interest rates, their default probability being 2.6 times higher than our sample average. Second, we show that the effect of interest rate changes on the default probability is asymmetric: interest rate cuts have rather small effects, whereas increases significantly raise default probabilities. Finally, we show that the magnitude of the effect of an interest rate increase depends on the history of net interest rate changes, with a consecutive interest rate increase having a 3 times stronger impact on the default probability than an increase following an interest rate decrease. JEL Classification: E52, G21, G51

Keywords: financial stability; monetary policy; mortgages (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-cba
Note: 3721475
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253112

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