Lower interest rates lead to significant decrease in mortgage defaults.
Monetary policy changes can affect mortgage default rates by changing how affordable loan repayments are for borrowers. A study on the Irish mortgage market found that a 1% reduction in borrower installments led to a 5.8% decrease in the likelihood of default over the following year. This impact was identified by comparing two types of adjustable rate mortgages offered to Irish borrowers in the mid-2000s. The study also showed that negative equity can offset some of the benefits of lower policy rates, showing a connection between monetary policy and asset prices in the mortgage market.