Monetary and macroprudential tightening reshapes Czech mortgage market
A new working paper examines how mortgage lending in the Czech Republic adjusted between 2020 and 2023 when higher interest rates coincided with tighter borrower-based regulatory constraints. The study uses loan-level data to trace changes in borrower and loan characteristics among new originations.
Borrower profiles shift under dual policy
During the initial phase of monetary policy tightening (2020–2023), higher interest rates curtailed mortgage lending.
Borrowers initially adjusted by featuring higher downpayments and longer maturities, partly absorbing rising financing costs.
As tightening persisted and borrower-based limits (LTV, DTI, DSTI) were reinstated, these adjustment margins narrowed.
New lending increasingly reflected financially stronger borrowers with lower leverage and lower default risk.
The evidence shows that while monetary policy primarily reduced lending volumes, the re-application of borrower-based limits significantly improved the risk composition of new loans.
Income limits and collateral buffers
Income-based regulatory limits, particularly DSTI, strongly interact with monetary policy tightening.
As rates rise, DSTI thresholds become more salient, restricting borrowing capacity and reallocating credit away from more vulnerable households.
This led to a decline in high-risk borrowers and a fall in the average probability of default among new loans, especially in the second phase of the tightening cycle.
Collateral values also played a role: additional collateral acted as a buffer against regulatory and rate-driven constraints, allowing some borrowers to maintain financing volumes despite worsening affordability.
A double-edged policy sword
This study provides crucial empirical evidence on how monetary and macroprudential policies interact, revealing unintended consequences for vulnerable borrowers.
While both tools target distinct risks, their combined effect can sharply reduce credit access, highlighting the need for flexible regulatory frameworks.
Policymakers must consider these distributional impacts to avoid exacerbating inequalities in housing finance.