Mortgage Choice and Expenditure over the Lifecycle: Evidence from Expiring Interest-Only Loans
40 Pages Posted: 1 Jan 2020 Last revised: 11 Nov 2020
Date Written: December 12, 2019
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: Suggested Citation