Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods

Abstract

This paper explores the changing relationship between current household repayment capacity and mortgage default during crisis and non-crisis periods in Ireland. We measure repayment capacity through changes in the current debt-service to income ratio to directly capture the affordability shock channel. We find that deteriorations in current debt servicing capacity have a positive and increasing effect on default which is dependent on the level of indebtedness or absorptive capacity. We find that the relationship between deteriorations in repayment capacity and default are worsened in crisis times due to the presence of negative equity and liquidity constraints in these periods.