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

Claes Bäckman*, Natalia Khorunzhina

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review


We use household-level data to analyze how the introduction of interest-only mortgages in Denmark affected consumption expenditure and borrowing. Using an ex-ante measure of exposure to the interest-only mortgage reform motivated by mortgage-payment and leverage constraints, we show households more likely to use an interest-only mortgage to relax their mortgage-payment constraint increased consumption following the reform. This increase in consumption is financed by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage and higher needs for liquidity. We find even larger post-reform consumption growth for the leverage-constrained homeowners through house-price growth stimulated by the reform.
Original languageEnglish
JournalInternational Economic Review
Issue number2
Pages (from-to)1049-1079
Number of pages31
Publication statusPublished - May 2024

Bibliographical note

Published online: 15 December 2023.


  • Consumption
  • Interest-only mortgages
  • Mortgage borrowing
  • Financial innovation

Cite this