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

42 Pages Posted: 22 Apr 2018 Last revised: 23 Sep 2019

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: September 20, 2019

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 to postpone repayment to a period with higher income, old households because it allows them to circumvent an otherwise binding liquidity constraint. Through different channels, IO mortgages thus facilitate consumption smoothing for young and old households. We further 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; 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? (September 20, 2019). 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
89
Abstract Views
621
rank
309,104
PlumX Metrics