In this paper we examine the sensitivity of mortgage arrears for Irish households to changes in mortgage interest
rates under a series of plausible monetary policy normalisation scenarios. Using panel data over the period 2004 - 2016 we
exploit information on current income and current mortgage repayments to link arrears to the level of, as well as shocks in,
households' current debt service ratio. In doing so we address gaps in the existing literature on modelling default and stress
testing. Both are found to be strong drivers of arrears indicating the level of indebtedness, as well as changes to repayment
capacity, matter for households. We find that a 100 basis point increase in policy rates would lead to a 0.5 percentage point
increase in new default flows. We also test for heterogeneous effects across households and find younger, low income
households and those on tracker mortgage rate loans are most at risk following rate rises. This has important consequences for
the distributional impacts of monetary policy