How Do Interest-Only Mortgages Affect Consumption and Saving Over the Life Cycle?

80 Pages Posted: 22 Apr 2018 Last revised: 12 Jul 2022

See all articles by Linda Sandris Larsen

Linda Sandris Larsen

Copenhagen Business School

Claus Munk

Copenhagen Business School

Rikke Sejer Nielsen

Copenhagen Business School

Jesper Rangvid

Copenhagen Business School

Date Written: July 12, 2022

Abstract

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

Larsen, Linda Sandris and Munk, Claus and Sejer Nielsen, Rikke and Rangvid, Jesper, How Do Interest-Only Mortgages Affect Consumption and Saving Over the Life Cycle? (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=3156963 or http://dx.doi.org/10.2139/ssrn.3156963

Linda Sandris Larsen

Copenhagen Business School ( email )

Solbjerg Plads 3, A5
Frederiksberg, 2000
Denmark

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Rikke Sejer Nielsen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Jesper Rangvid

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
DENMARK

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