Chasing Lower Rates: How Households Balance Refinancing Incentives and Debt Constraints

Martin Hodula, Simona Malovana and Lukas Pfeifer

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: This paper examines how mortgage lending adjusts when higher interest rates coincide with tighter borrower-based regulatory constraints. Using loan-level data from the Czech Republic for 2020–2023, we exploit a unique policy sequence that combines rapid monetary tightening with the subsequent re-tightening of LTV, DTI, and DSTI limits in order to trace changes in borrower and loan characteristics among new originations. During the initial phase of tightening, higher interest rates curtailed mortgage lending, yet some adjustment was still possible: new loans started to feature higher downpayments and longer maturities, which partly absorbed the rise in financing costs. As tightening persisted and borrower-based limits were reinstated, these adjustment margins narrowed. Liquidity buffers were depleted, and new lending increasingly reflected financially stronger borrowers with lower leverage and lower default risk. The evidence further shows that while monetary policy primarily reduced lending volumes, it was the re-application of borrower-based limits that improved the risk composition of new loans.

Keywords: Borrower-based limits; household finance; loan-level data; macroprudential policy; monetary policy (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 G51 (search for similar items in EconPapers)
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