Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/95702 
Year of Publication: 
2014
Series/Report no.: 
Bank of Canada Working Paper No. 2014-1
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
Subjects: 
Credit and credit aggregates
Transmission of monetary policy
JEL: 
D12
E43
E52
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
505.78 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.