Household Debt, Mortgage Risk, and Monetary Tightening in Romania:Stress-Testing Affordability Under Alternative Interest Rate Paths

Abstract

Over the last decade, Romania has experienced a rapid expansion of household mortgage lending, supported by sustained income growth, accommodative monetary conditions, and structural changes in the domestic housing market. While mortgage penetration remains below the European Union average, the increasing reliance on variable-rate mortgage contracts has heightened household exposure to interest rate risk. The abrupt shift toward monetary tightening since 2021—driven by elevated inflationary pressures and reinforced by synchronised policy normalisation across Europe—has fundamentally altered the risk landscape faced by indebted households. This paper examines the resilience of Romanian households to rising borrowing costs by conducting a comprehensive stress test of mortgage affordability under alternative interest rate paths. Using a household-level micro-simulation framework calibrated with nationally representative survey data and mortgage market characteristics, the study evaluates changes in debt-service-to-income (DSTI) ratios across income deciles, borrower profiles, and loan structures. Three scenarios are considered: a baseline scenario reflecting gradual interest rate normalisation, an adverse scenario involving a sustained increase in policy rates, and a severe scenario combining sharp rate hikes with a negative income shock. The results reveal pronounced non-linear effects of monetary tightening on mortgage affordability, with affordability breaches rising sharply once interest rates exceed critical thresholds. Young households, first-time homebuyers, and lower-income borrowers emerge as the most vulnerable groups, particularly in the presence of variable-rate mortgage contracts. The findings carry important implications for macroprudential policy in Romania. They point out the need for proactive borrower-based measures, enhanced stress-testing practices, and a stronger policy emphasis on fixed-rate mortgage products. Overall, the study adds to the understanding of household finance and financial stability by being the first detailed look at how affordable mortgages are for people in Romania and sharing useful information for other developing European countries with similar issues.