Mortgage Choice and Expenditure over the Lifecycle: Evidence from Expiring Interest-Only Loans

40 Pages Posted: 1 Jan 2020 Last revised: 11 Nov 2020

See all articles by Henrik Yde Andersen

Henrik Yde Andersen

Danmarks Nationalbank (The Central Bank of Denmark)

Stine Ludvig Bech

affiliation not provided to SSRN

Alessia De Stefani

International Monetary Fund

Date Written: December 12, 2019

Abstract

We study how homeowners’ consumption responds to a negative and anticipated dis- posable income shock: the beginning of the amortization period on interest-only mort- gages. We identify spending behavior through an event study approach, by matching loan-level data that covers the universe of Danish mortgages to detailed administrative registries on borrowers. In response to an average increase in installments worth 9 per- cent of income, consumption drops by 3 percent of income, when amortization begins. The reduction in expenditure is persistent. Borrowers who fail to smooth consumption are highly leveraged and likely to be denied a new interest-only loan, upon expiration.

Keywords: Interest-only mortgages, Consumption, Hand-to-mouth

JEL Classification: D15, E21, G51

Suggested Citation

Andersen, Henrik Yde and Ludvig Bech, Stine and De Stefani, Alessia, Mortgage Choice and Expenditure over the Lifecycle: Evidence from Expiring Interest-Only Loans (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3496842 or http://dx.doi.org/10.2139/ssrn.3496842

Henrik Yde Andersen

Danmarks Nationalbank (The Central Bank of Denmark) ( email )

Havnegade 5
Copenhagen, 1093
Denmark

Stine Ludvig Bech

affiliation not provided to SSRN

Alessia De Stefani (Contact Author)

International Monetary Fund ( email )

United States

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