European Central Bank working paper finds higher lending rates are raising distress risk in euro area household loans led by adjustable rate mortgages

The European Central Bank published Working Paper Series No 3053 assessing how the recent rise in bank lending rates has affected the riskiness of euro area household borrowing, using a microsimulation that updates Household Finance and Consumption Survey microdata with country-level macro-financial developments through 2023 Q2. The simulations indicate that higher rates have made debt servicing more demanding and increased the share of loans held by financially distressed borrowers, with the strongest effects in adjustable-rate mortgages and in the most recently originated adjustable-rate cohorts. Between 2022 Q2 and 2023 Q2, median debt service-to-income for the euro area loan stock rose by 6 percentage points and the simulated share of loans with debt service-to-income above 40% increased from 26% to 33%, while median debt-to-income fell from 3.8 to 3.5 and the share with debt-to-income above 5 declined from 35% to 32%. The share of loans held by financially distressed borrowers increased from 3.2% to 5.4% over the same period. By product, adjustable-rate mortgages drove the deterioration in servicing metrics, with median debt service-to-income rising from 24% to 37% and the share above 40% rising from 25% to 46%, compared with a smaller increase for fixed-rate mortgages and a moderate worsening for consumer credit. The paper also reports that more than 90% of loans are extended to households whose real estate assets exceed their debt, providing collateral buffers even as servicing pressures rise.