The Determinants of Mortgage Interest Rates: An Empirical Analysis of the Euro Area Countries

Abstract

Using the harmonised statistics of the Eurosystem, this paper focuses on the determinants of the fixed and variable mortgage interest rates applied to new transactions concluded by households resident in euro area countries in the period between 2003 and 2009. The econometric analyses show that of the various explanatory factors considered, the cost of deposits, the level of guarantees given, the intensity of the bank-customer relationship and the efficiency of the civil justice system appear to have the most influence on mortgage interest rates. Bank competitiveness does not appear to affect interest rates. There is no evidence that the financial crisis has generally led to the application of more stringent economic conditions to mortgages by the European banking industry. What does emerge is each country’s very different reaction to the crisis.

Keywords: bank interest rates, mortgages, retail market

JEL Classification: E43, E44