How Do Interest-Only Mortgages Affect Consumption and Saving Over the Life Cycle?
80 Pages Posted: 22 Apr 2018 Last revised: 12 Jul 2022
Date Written: July 12, 2022
Using a unique data set with detailed information on Danish households and their mortgages, we show that young and old households are more likely to use IO mortgages compared to middle-aged households. Young households use IO mortgages because they expect higher future income, old households because IO mortgages allow them to circumvent an otherwise binding liquidity constraint. Through different channels, IO mortgages thus facilitate consumption smoothing for young and old households. Our detailed data also allow us to examine how households with IO mortgages differ from households with repayment mortgages in terms of leverage, debt and asset composition, and pension contributions.
Keywords: Interest-only mortgages; micro data; consumption and savings pattern; life-cycle planning; financial constraints
JEL Classification: G11
Suggested Citation: Suggested Citation