Spending Response to a Predictable Increase in Mortgage Repayments: Evidence from Expiring Interest-Only Loans

Henrik Yde Andersen, Stine Ludvig Bech and Alessia De Stefani
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Henrik Yde Andersen: Danmarks Nationalbank
Stine Ludvig Bech: Danmarks Nationalbank
Alessia De Stefani: International Monetary Fund

The Review of Economics and Statistics, 2024, vol. 106, issue 1, 277-285

Abstract: We study how homeowners' consumption responds to a negative and anticipated disposable income shock: the beginning of the amortization period on interest-only mortgages. We identify spending behavior through an event study approach, by matching loan-level data that covers the universe of Danish mortgages to detailed administrative registries on borrowers. In response to an average increase in installments worth 9% of income, consumption drops by 3% of income, when amortization begins. The reduction in expenditure is persistent. Borrowers who fail to smooth consumption are highly leveraged and likely to be denied a new interest-only loan, upon expiration.

Date: 2024
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