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.
Bibliographical noteEpub ahead of print. Published online 18 May 2023
- Interest-only mortgages
- Micro data
- Consumption and savings pattern
- Life cycle planning
- Financial constraints