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

Linda Sandris Larsen, Claus Munk*, Rikke Sejer Nielsen, Jesper Rangvid

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalManagement Science
Number of pages22
ISSN0025-1909
DOIs
Publication statusPublished - 18 May 2023

Bibliographical note

Epub ahead of print. Published online 18 May 2023

Keywords

  • Interest-only mortgages
  • Micro data
  • Consumption and savings pattern
  • Life cycle planning
  • Financial constraints

Cite this