The Response of Debtors to Rate Changes

The Response of Debtors to Rate Changes

How borrowers respond to future changes in the interest rate on their debt is of crucial importance 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 borrowers face high interest rates since 2022 when their rate fixation period ends. We find that borrowers take various actions to reduce the impact of higher rates on interest 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. Our letter intervention does not affect rate beliefs, consistent with high ex-ante knowledge, but increases awareness of available options and the desire to prepare. Ongoing tracking will reveal whether this awareness translates into actual behavior.