The Response of Debtors to Rate Changes

Abstract

How borrowers respond to future changes in the interest rate on their debt matters for the transmission of monetary policy and for financial stability. Combining data from a large bank, a letter RCT, and an online survey, we study this question in the context of the German mortgage market, where since 2022 borrowers have faced high interest rates when their rate fixation period ends. We find that various borrower actions substantially reduce the impact of higher rates on monthly payments. Survey responses indicate high awareness of the evolution of interest rates and corroborate a strong propensity to prepare for the rate reset, which we show experimentally is sensitive to the size of the rate increase and to the distance from reset. The letter intervention does not affect rate beliefs, consistent with high ex-ante informedness and selection into reading, but increases awareness of available options and refinancing propensities among borrowers who had not taken action until close to the reset date. Joint paper with Virginia Gianinazzi, Andreas Hackethal, Philip Schnorpfeil, and Michael Weber.