Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform
47 Pages Posted: 6 Mar 2020 Last revised: 9 Nov 2020
Date Written: February 6, 2020
Mortgage finance innovation came into prominence in many economies prior to the Great Recession. In this paper we use detailed household-level data to analyze how the introduction of interest-only mortgages in Denmark affected consumption expenditure and borrowing. Using an ex-ante measure of exposure to the interest-only mortgage reform motivated by mortgage-payment and leverage constraints, we show that households who are more likely to use an interest-only mortgage increased consumption substantially following the reform. The increase in consumption is largely financed by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage ratios.
Keywords: Consumption, Interest-only Mortgages, Mortgage Borrowing, Financial Innovation
JEL Classification: D14, E21, G21
Suggested Citation: Suggested Citation