How Do Interest-Only Mortgages Affect Consumption and Saving over the Life Cycle?

Linda Sandris Larsen (), Claus Munk (), Rikke Sejer Nielsen () and Jesper Rangvid ()
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Linda Sandris Larsen: PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark
Claus Munk: PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark
Rikke Sejer Nielsen: PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark
Jesper Rangvid: PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark

Management Science, 2024, vol. 70, issue 3, 1970-1991

Abstract: Using a unique data set with detailed information on Danish households and their mortgages, we show that young and old households are more likely to use interest-only (IO) mortgages compared with middle-aged households. Young households use IO mortgages because they expect higher future income and old households because IO mortgages allow them to circumvent an otherwise binding liquidity constraint. Through different channels, IO mortgages thus facilitate consumption smoothing for young and old households. Our detailed data also allow us to examine how households with IO mortgages differ from households with repayment mortgages in terms of leverage, debt and asset composition, and pension contributions.

Keywords: interest-only mortgages; micro data; consumption and savings pattern; life cycle planning; financial constraints (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1970-1991

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