Household risk management and actual mortgage choice in the euro area

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2014-1

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Empirical Analysis ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Credit and credit aggregates ; Transmission of monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ehrmann, Michael ; Ziegelmeyer, Michael
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2014

Further information

• DOI: doi:10.34989/swp-2014-1
• Handle: http://hdl.handle.net/10419/95702
• Last update: 10.03.2025, 11:43 AM CET