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 in- debtedness and borrowing conditions. The study addresses the following research ques- tion: “Are mortgage interest rates significantly associated with household financial vul- nerability across euro area countries under varying macroeconomic conditions?” Design/methodology/approach – The analysis examines a panel of 17 euro area coun- tries from 2005 to 2024, using the household debt-to-income ratio as a proxy for lever- age-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, con- trolling 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 vulnera- bility 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 borrow- ing conditions and household leverage for understanding household financial vulnerabil- ity. 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 aggre- gate country-level data and does not capture heterogeneity among households or mort- gage 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 borrow- ing costs and leverage-based household financial vulnerability. The analysis further ex- amines the robustness and dynamic properties of this association across different mac- roeconomic conditions. Keywords: Households, mortgage interest rates, financial vulnerability, panel data analysis, GMM. JEL Classification: C23, C51, D14, E43, G21.