Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/334997 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3112
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
Monetary Policy
Financial Stability
Mortgages
JEL: 
E52
G21
G51
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7432-5
Document Type: 
Working Paper

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