INTEREST‐ONLY MORTGAGES AND CONSUMPTION GROWTH: EVIDENCE FROM A MORTGAGE MARKET REFORM

Claes Bäckman and Natalia Khorunzhina

International Economic Review, 2024, vol. 65, issue 2, 1049-1079

Abstract: We use household‐level data to analyze how the introduction of interest‐only (IO) mortgages in Denmark affected consumption expenditure and borrowing. Using an ex ante measure of exposure to the IO mortgage reform motivated by mortgage‐payment and leverage constraints, we show households more likely to use an IO mortgage to relax their mortgage‐payment constraint increased consumption following the reform. This increase in consumption is financed by borrowing at the time of refinancing and by borrowers with lower prereform leverage and higher needs for liquidity. We find even larger postreform consumption growth for the leverage‐constrained homeowners through house‐price growth stimulated by the reform.

Date: 2024
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https://doi.org/10.1111/iere.12682

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Working Paper: Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform (2020)
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