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

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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.
Original languageEnglish
Publication date2020
Number of pages43
Publication statusPublished - 2020
EventThe 55th AREUEA-ASSA Conference 2020 - San Diego, United States
Duration: 3 Jan 20205 Jan 2020
Conference number: 55
https://www.areuea.org/conferences/details.phtml?id=117

Conference

ConferenceThe 55th AREUEA-ASSA Conference 2020
Number55
CountryUnited States
CitySan Diego
Period03/01/202005/01/2020
OtherJoint session with the American Economic Association (AEA) and a joint session with the American Finance Association (AFA)
Internet address

Cite this

Bäckman, C., & Khorunzhina, N. (2020). Interest-only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform. Paper presented at The 55th AREUEA-ASSA Conference 2020, San Diego, United States.