Amortization Requirements and Household Indebtedness: An Application to Swedish- Style Mortgages

European Economic Review, Vol. 91, 72-88

Sveriges Riksbank Working Paper Series No. 298

32 Pages Posted: 13 Aug 2015 Last revised: 12 Dec 2020

See all articles by Isaiah Hull

Isaiah Hull

Sveriges Riksbank - Research Division

Date Written: April 1, 2015

Abstract

Since the mid-1990s, many OECD countries have experienced a substantial increase in household indebtedness. Sweden, in particular, has seen indebtedness rise from 90% of disposable income in 1995 to 172% in 2014. The Swedish Financial Supervisory Authority (FSA) has identified mortgage amortization requirements as a potential instrument for reducing indebtedness; and has drafted guidelines that will intensify the rate and duration of amortization. In this paper, I characterize Swedish-style mortgage contracts, which differ substantially from U.S.-style contracts. I then evaluate the policy changes in an incomplete markets model with three types of debt and a novel mortgage contract specification that is calibrated to match Swedish micro and macro data. I find that intensifying the rate and duration of amortization is largely ineffective at reducing indebtedness in a realistically-calibrated model. In the absence of implausibly large refinancing COSTs or tight restrictions on the maximum debt-service-to-income ratio, the policy impact is small in aggregate, over the lifecycle, and across employment statuses. These results may be relevant for other OECD countries, such as Norway and Canada, that have also not seen a reduction in house prices or indebtedness since the 2007 financial crisis.

Keywords: Mortgages, Amortization, Heterogeneous Agents, Incomplete Markets, Financial Regulation

JEL Classification: E44, G21, R21

Suggested Citation

Hull, Isaiah, Amortization Requirements and Household Indebtedness: An Application to Swedish- Style Mortgages (April 1, 2015). European Economic Review, Vol. 91, 72-88, Sveriges Riksbank Working Paper Series No. 298, Available at SSRN: https://ssrn.com/abstract=2635373 or http://dx.doi.org/10.2139/ssrn.2635373

Isaiah Hull (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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