IDEAS home Printed from https://ideas.repec.org/p/cbi/fsnote/2-fs-24.html
   My bibliography  Save this paper

Mortgage switching through the turning of the interest rate cycle

Author

Listed:
  • Scott, David

    (Central Bank of Ireland)

  • Pratap Singh, Anuj

    (Central Bank of Ireland)

Abstract

Mortgage switching, and the choice of contract type, can have important implications for borrower resilience to interest rate movements. In this Note, we focus on switching in the Irish mortgage market in the run-up to (August 2018-June 2022) and early phase of the European Central Bank’s (ECB) contractionary monetary policy from July to December 2022. Using the Central Credit Register (CCR), we find that mortgage switching had been steadily increasing in the period of falling interest rates since 2018 but grew particularly quickly during the early months of the ECB’s monetary policy tightening cycle. The increase in switching was primarily to and from fixed-rate contracts, and remained strong even as the immediate short-term monetary gains from switching were reducing, signifying borrower’s forward-looking choices in seeking to avoid future increases in monthly repayments. We also find that non-banks were particularly important in leading interest rates downwards from 2019 to 2022, a trend which reversed abruptly once ECB policy rates rose. In terms of borrowers’ financial outcomes, we find interest rate gains from mortgage switching of up to 1.3 pp, equating to annual savings worth €2,000 on average.

Suggested Citation

  • Scott, David & Pratap Singh, Anuj, 2024. "Mortgage switching through the turning of the interest rate cycle," Financial Stability Notes 2/FS/24, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:2/fs/24
    as

    Download full text from publisher

    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/mortgage-switching-through-the-turning-of-the-interest-rate-cycle.pdf?sfvrsn=2dd4631a_6
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tobias ADRIAN & Bradley JONES, 2018. "Shadow banking and market-based finance," Financial Stability Review, Banque de France, issue 22, pages 13-24, April.
    2. Devine, Kenneth, 2022. "Refinancing Inertia in the Irish Mortgage Market," Research Technical Papers 5/RT/22, Central Bank of Ireland.
    3. Devine, Kenneth & McCarthy, Yvonne & O’Toole, Conor, 2023. "The role of borrower expectations in mortgage choice," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    4. Martin Flodén & Matilda Kilström & Jósef Sigurdsson & Roine Vestman, 2021. "Household Debt and Monetary Policy: Revealing the Cash-Flow Channel," The Economic Journal, Royal Economic Society, vol. 131(636), pages 1742-1771.
    5. Byrne, David & McCann, Fergal & Gaffney, Edward, 2023. "The interest rate exposure of mortgaged Irish households," Financial Stability Notes 2/FS/23, Central Bank of Ireland.
    6. Byrne, Shane & Devine, Kenneth & McCarthy, Yvonne, 2020. "Room to improve: a review of switching activity in the Irish mortgage market," Economic Letters 12/EL/20, Central Bank of Ireland.
    7. Devine, Kenneth & Frost, Sarah & McElligott, Rory, 2015. "Switch and Save in the Irish Mortgage Market?," Economic Letters 08/EL/15, Central Bank of Ireland.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Devine, Kenneth, 2022. "Refinancing Inertia in the Irish Mortgage Market," Research Technical Papers 5/RT/22, Central Bank of Ireland.
    2. Byrne, Shane & Devine, Kenneth & McCarthy, Yvonne, 2022. "Interrupting inertia: evidence from a mortgage refinancing field trial," Economic Letters 9/EL/22, Central Bank of Ireland.
    3. Serdar Ozkan & Kurt Mitman & Fatih Karahan & Aaron Hedlund, 2016. "Monetary Policy, Heterogeneity and the Housing Channel," 2016 Meeting Papers 663, Society for Economic Dynamics.
    4. Christoph Kaufmann, 2023. "Investment Funds, Monetary Policy, and the Global Financial Cycle," Journal of the European Economic Association, European Economic Association, vol. 21(2), pages 593-636.
    5. Albertazzi, Ugo & Fringuellotti, Fulvia & Ongena, Steven, 2024. "Fixed rate versus adjustable rate mortgages: Evidence from euro area banks," European Economic Review, Elsevier, vol. 161(C).
    6. Sang-yoon Song, 2019. "The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers," Working Papers 2019-20, Economic Research Institute, Bank of Korea.
    7. Fergus Cumming & Paul Hubert, 2019. "The Role of Households' Borrowing Constraints in the Transmission of Monetary Policy This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of ," Documents de Travail de l'OFCE 2019-20, Observatoire Francais des Conjonctures Economiques (OFCE).
    8. Katya Kartashova & Xiaoqing Zhou, 2020. "How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers," Staff Working Papers 20-18, Bank of Canada.
    9. Jiaqian Chen & Daria Finocchiaro & Jesper Linde & Karl Walentin, 2023. "The costs of macroprudential deleveraging in a liquidity trap"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 991-1011, December.
    10. Fergus Cumming & Paul Hubert, 2019. "The role of households' borrowing constraints in the transmission of monetary policy," SciencePo Working papers Main hal-03403257, HAL.
    11. Gaston Gelos & Federico Grinberg & Shujaat Khan & Tommaso Mancini-Griffoli & Machiko Narita & Umang Rawat, 2024. "Has Higher Household Indebtedness Weakened Monetary Policy Transmission?," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 325-371, February.
    12. Kirchner Philipp, 2020. "On Shadow Banking and Financial Frictions in DSGE Modeling," Review of Economics, De Gruyter, vol. 71(2), pages 101-133, August.
    13. Papadopoulos, Alexandros & McGowan, Féidhlim & McGinnity, Frances & Timmons, Shane & Lunn, Pete, 2023. "Switching activity in retail financial markets in Ireland," Research Series, Economic and Social Research Institute (ESRI), number RS161.
    14. Gebauer Stefan, 2021. "Welfare-Based Optimal Macroprudential Policy with Shadow Banks," Working papers 817, Banque de France.
    15. Bashir Ahmad Joo & Simtiha Ishaq Mir, 2024. "Evolution of the Household Debt Narrative: A PRISMA-compliant Systematic Literature Review," Paradigm, , vol. 28(1), pages 84-100, June.
    16. repec:spo:wpmain:info:hdl:2441/5buvtkmlk091prrdje4a0tbkla is not listed on IDEAS
    17. Funke, Michael & Li, Xiang & Zhong, Doudou, 2023. "Household indebtedness, financial frictions and the transmission of monetary policy to consumption: Evidence from China," Emerging Markets Review, Elsevier, vol. 55(C).
    18. Gardó, Sándor & Klaus, Benjamin, 2020. "Overcapacities in banking: Measurement, trends and determinants," Economic Modelling, Elsevier, vol. 91(C), pages 819-834.
    19. Gebauer, Stefan & Mazelis, Falk, 2023. "Macroprudential regulation and leakage to the shadow banking sector," European Economic Review, Elsevier, vol. 154(C).
    20. Timmons, Shane & Barjaková, Martina & McElvaney, Terry & Lunn, Pete, 2019. "Can official advice improve mortgage-holders’ perceptions of switching? An experimental investigation," Papers WP612, Economic and Social Research Institute (ESRI).
    21. Isayev, Mugabil & Gokmenoglu, Korhan, 2024. "The role of shadow banking towards a sustainable growth path," Renewable Energy, Elsevier, vol. 228(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbi:fsnote:2/fs/24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fiona Farrelly (email available below). General contact details of provider: https://edirc.repec.org/data/cbigvie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.