Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform

Claes Bäckman and Natalia Khorunzhina

MPRA Paper from University Library of Munich, Germany

Abstract: We use detailed household-level data from Denmark to analyze how the introduction of interest-only mortgages affected consumption expenditure and borrowing. Four years after the reform interest-only mortgages constituted 40 percent of outstanding mortgage debt. Using an ex-ante measure of exposure motivated by financial constraints, we show households who are more likely to use an IO mortgage, increased consumption substantially following the reform. The increase in consumption is driven by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage ratios. Our results show changes in the mortgage contract can have large impacts on consumption expenditure.

Keywords: Consumption; Mortgage Market (search for similar items in EconPapers)
JEL-codes: D14 E21 G21 (search for similar items in EconPapers)
Date: 2020-02-06
New Economics Papers: this item is included in nep-mac and nep-ure
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