Responses to Saving Commitments: Evidence from Mortgage Run-Offs

Abstract

We study how individuals respond to the removal of a saving constraint. Mortgage run-offs predictably relax a saving constraint for borrowers who chose mortgage contracts that committed them to effectively save by paying down mortgage principal. Using the universe the Danish populations we identify individuals whose mortgages were on track to run off between 1995 and 2014. We use mortgage runoffs to understand the importance of relaxing a saving constraint on wealth, leisure, consumption, saving, and investment decisions – as well as the mechanism individuals use to circumvent the saving constraint. We find that on average, borrowers use 39 percent of the resources previously devoted to mortgage payments to decrease labor income, and use 53 percent to pay down other debts. The labor supply response is limited to those without substantial assets or debts prior to the run-off, while the debt reduction response is limited to (and one-for-one among) those without substantial assets but with other debt prior to the run-off. We find no statistically significant results for wealth accumulation in bank deposits, stocks, or bonds.

JEL Classification: D12, D14, E21, G21