Early Repayment without Early Benefits: The Impacts of the Law on Early Repayment of Foreign Currency Denominated Mortgage Loans at Below-market Exchange Rates in Hungary

Abstract

This paper examines the housing and economic impacts of the law on early repayment of foreign currency denominated mortgage loans at below-market exchange rates in Hungary. The purpose of the law was to ease the debt service burden of households with FX mortgage loans through a significant debt forgiveness. The law resulted in a vastly unequal distribution of wealth shock as wealthier households were the beneficiaries of the policy. Empirical evidence presented in other papers shows that these households tend to have lower MPC. Due to the level of data used in the Synthetic Control Method, the MPC calculated in this paper is applicable on an aggregate level. However, since the law impacted less poor households directly, an interpretation of a low MPC could be that the underlying driver of the MPC is the change in wealthier households’ consumption and in their net housing wealth due to the law. I find some evidence of a depreciating Hungarian forint (against the euro) for certain periods as a result of the policy. There is no evidence found on a severe harm on the real economy measured by GDP deflator index and real GDP index.