Mortgage Design, Repayment Schedules, and Household Borrowing

Claes Bäckman, Patrick Moran and Peter van Santen ()

No 2024-077, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

Keywords: Mortgage design; Amortization payments; Macroprudential policy; Bunching (search for similar items in EconPapers)
JEL-codes: E21 E60 G21 G51 (search for similar items in EconPapers)
Pages: 71 p.
Date: 2024-09-20
New Economics Papers: this item is included in nep-ban and nep-ure
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https://www.federalreserve.gov/econres/feds/files/2024077pap.pdf (application/pdf)

Related works:
Working Paper: Mortgage design, repayment schedules, and household borrowing (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-77

DOI: 10.17016/FEDS.2024.077

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