The exposure of mortgage borrowers to interest rate risk and house price risk : evidence from Swiss loan application data

We study the aggregate exposure of mortgage borrowers in Switzerland to interest rate and house price risks and examine how the households' choice of risky mortgages is related to individual interest rate expectations and regional house price variation. The analysis is based on a unique data set of household mortgage applications. Our results suggest that the aggregate long-term exposure to interest rate and house price risks could be significant while the medium-term exposure is limited. We show that households expecting interest rates to increase choose long-term fixed rate mortgages. Yet, there is no evidence that regional house price developments matter.