Average mortgage interest rates in the euro area are expected to continue rising in the coming years, despite recent banking rate cuts by the European Central Bank. In an ECB blog post published on 28 May 2025, economists cited the lagged effects of the previous interest rate hiking cycle, the structure of mortgage contracts and their uneven distribution across income groups and countries. These factors are projected to weigh on private consumption at least until 2030, they added.

Lagged monetary policy transmission

The report explained that the housing loan contracts often feature long or full-duration fixed interest rates, which means that changes in policy rates take time to affect average household borrowing costs. During periods of rapid monetary policy shifts, this delay can result in rising mortgage payments even as the ECB lowers its key rates in an effort to stimulate the economy. Economists noted that this disconnect between policy intent and household experience contributes to a prolonged drag on consumption.

The transmission of monetary policy through mortgage interest payments depends largely on the interest rate environment at the beginning of the cycle and the type of mortgage products in place. Market expectations currently suggest that the euro area will not revert to the low-rate, low-inflation environment seen prior to 2021. As a result, the interest rates paid on existing mortgages are likely to keep increasing.

Mortgage type and distribution

Using data from the ECB’s Consumer Expectations Survey (CES), the ECB economists found that mortgage payments are projected to rise further in the coming years, despite falling rates on new mortgage loans. The structure of mortgage markets across the euro area plays a key role in this trend.

Roughly 25% of euro area mortgages are adjustable-rate mortgages (ARMs), which respond quickly to interest rate changes. The majority are fixed-rate mortgages (FRMs), many of which have remained unaffected by recent policy changes but are expected to reprice as their fixed terms expire. Approximately 10% of FRMs will reprice within the next three years, and a further 20% by 2030.

There is also significant cross-country variation. ARMs are more common in Spain and Italy, while FRMs dominate in France and Germany. These differences result in varying responses to monetary policy changes at the national level.

Income-based vulnerability

The distribution of mortgage types across income groups further contributes to an uneven transmission of monetary policy. Lower-income households are more likely to hold ARMs, making them more vulnerable to rising interest rates. Among households in the lowest 20% income bracket, 32% of mortgages are ARMs, compared to only 17% among the highest income quintile.

The economists attributed this to two primary factors. First, FRMs generally carry higher upfront costs, which are more difficult for liquidity-constrained households to afford. Second, households with higher incomes tend to exhibit greater financial literacy, increasing their likelihood of choosing long-term fixed-rate products as a hedge against future rate volatility.

Mortgage interest rates outlook

During the 2022-2023 tightening cycle, policy rate increases pushed up the interest paid on outstanding mortgages. Based on CES data and microsimulations, economists projected that average mortgage interest rates will continue to rise, even as lending rates on new loans decline. This trend is driven by the gradual repricing of FRMs issued during the low-interest period, as well as new borrowers entering the market at higher rates.

The average rate on outstanding mortgages will rise as long as it remains lower than that of new loans. This increase has already been steeper for lower-income borrowers. In 2024, the average rate for the bottom 20% income group reached around 3%, and 2.7% for budget-constrained households spending more than 75% of income on housing and food. In contrast, the average rate for the top 20% was just above 2%.

Rates for lower-income mortgagors are expected to rise more steeply until 2026. After that, higher-income households will begin to see increases, but by 2030 the burden will still be greater for lower-income borrowers, as many higher-income households will continue to hold long-term FRMs that will not have repriced by then.

Consumption under pressure

Higher mortgage payments have led many households to reduce their consumption or savings. According to the CES, 46% of mortgagors reduced their spending over the past year, either in response to or anticipation of rising mortgage costs. Those with ARMs were the most likely to make early repayments, suggesting they sought to reduce higher-interest debt rather than save at lower rates.

This pattern is expected to continue as more FRMs reprice. Looking ahead, 48% of households with a mortgage plan to continue limiting consumption over the next year. The degree of expected reduction varies based on mortgage type and expectations of future interest rates. Households with FRMs nearing expiry are especially sensitive to interest rate expectations. Planned reductions in consumption were significantly larger among those anticipating higher rates.