The Mortgage Piggy Bank: Building Wealth through Amortization

Asaf Bernstein and Peter Koudijs

No 28574, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Mortgage amortization schedules are among the largest savings plans in the world (e.g. U.S. households contribute hundreds of billions of dollars annually to these “mortgage piggy banks”). However, little is known about their effects on wealth accumulation. Ex-ante, effects are unclear. It depends on the fungibility of home equity and other savings, and households’ willingness to adjust consumption or leisure. Empirically, effects are difficult to identify since amortization and other savings choices are typically codetermined. We overcome this challenge by utilizing a 2013 Dutch reform that increased amortization requirements for new mortgages. Using detailed administrative data, we compare savings decisions for home-buyers right before or after the reform. We use plausibly exogenous variation in the timing of home purchase coming from life-events (e.g. birth of a child) to address selection concerns. Dynamic difference-in- difference estimates support the parallel trend assumption. We find that marginal wealth-building from amortization (MWA) is substantial. Remarkably, households leave other savings untouched and cut consumption and leisure instead, implying a near 1-for-1 rise in net-worth. Results hold at least five years out when additional amortization-induced home equity is larger than other savings. The effect is ubiquitous, holding for unconstrained households, who could easily offset additional amortization, and movers, suggesting a broad applicability of our results. Consistent with a simple model, we do find that estimates are lower for households who appear less financially sophisticated or less willing to adjust short-term consumption. Overall, our results highlight the critical importance of mortgage amortization for household wealth-building and macroprudential policies.

JEL-codes: D14 D15 E21 E6 G21 G4 G5 G51 J2 R3 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cwa, nep-eur, nep-lma, nep-mac and nep-ure
Note: AG CF LS PE
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Published as Asaf Bernstein & Peter Koudijs, 2024. "The Mortgage Piggy Bank: Building Wealth Through Amortization," The Quarterly Journal of Economics, vol 139(3), pages 1767-1825.

Downloads: (external link)
http://www.nber.org/papers/w28574.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:28574

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28574

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().