Mortgage Innovation and House Price Booms

Abstract

We study the rapid legalization of interest-only (IO) mortgages in Denmark, a country with strictly enforced recourse borrowing and a robust regulatory mortgage lending framework. The Danish introduction of IO mortgages ignited a housing boom: due to their introduction, house prices increased 36 percent. In line with IO loans fueling house price appreciation by lowering debt-service payments, results show higher IO loan uptake and house price growth in areas with greater ex-ante benefits of such mortgages. Overall, our results are relevant for the many countries where elevated IO mortgage use has correlated with house price increases.

Keywords: Interest Only Mortgages, Housing Booms; Mortgage Lending

JEL Classification: G51, G21, R21, R30