Mortgage interest rates and household financial vulnerability: Evidence from the euro area

Aim/purpose – This paper examines the association between mortgage interest rates and household financial vulnerability in the euro area, focusing on rising household indebtedness and borrowing conditions. The study addresses the following research question: “Are mortgage interest rates significantly associated with household financial vulnerability across euro area countries under varying macroeconomic conditions?”

Design/methodology/approach – The analysis examines a panel of 17 euro area countries from 2005 to 2024, using the household debt-to-income ratio as a proxy for leverage-based macro-level household financial vulnerability. Fixed-effects and generalized method of moments (GMM) estimates are employed. Specifications compare the full sample with a non-crisis sample excluding the periods 2008–2012 and 2020–2022, controlling for unemployment, inflation, GDP, house prices, and consumer confidence.

Findings – The results indicate a statistically significant negative association between mortgage interest rates and household financial vulnerability across all specifications. Higher interest rates are associated with lower debt-to-income ratios, suggesting lower household leverage. The findings are broadly consistent across specifications, while GMM estimations additionally highlight the persistence of household financial vulnerability over time. Among the control variables, unemployment is positively associated with household financial vulnerability, whereas inflation, house prices, GDP, and consumer confidence show weaker or model-dependent associations.

Research implications/limitations – The findings underscore the importance of borrowing conditions and household leverage for understanding household financial vulnerability. The positive association between unemployment and vulnerability further suggests that labor-market conditions should be considered in macroprudential monitoring and when assessing risks in household balance sheets. However, the analysis relies on aggregate country-level data and does not capture heterogeneity among households or mortgage types. Future research could employ micro-level data and distinguish between fixed- and variable-rate mortgage structures.

Originality/value/contribution – The paper contributes to the literature by providing euro-area macro-panel evidence on the association between mortgage-specific borrowing costs and leverage-based household financial vulnerability. The analysis further examines the robustness and dynamic properties of this association across different macroeconomic conditions.