Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform

44 Pages Posted: 6 Mar 2020

See all articles by Claes Bäckman

Claes Bäckman

Aarhus University - Department of Business and Economics; Knut Wicksell Centre for Financial Studies

Natalia Khorunzhina

Copenhagen Business School - Faculty of Economics and Business Administration

Date Written: February 6, 2020

Abstract

We use detailed household-level data from Denmark to analyze how the introduction of interest-only mortgages affected consumption expenditure and borrowing. Four years after the reform interest-only mortgages constituted 40 percent of outstanding mortgage debt. Using an ex-ante measure of exposure motivated by financial constraints, we show households who are more likely to use an IO mortgage, increased consumption substantially following the reform. The increase in consumption is driven by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage ratios. Our results show changes in the mortgage contract can have large impacts on consumption expenditure.

Keywords: Consumption, Mortgage Market

JEL Classification: D14, E21, G21

Suggested Citation

Bäckman, Claes and Khorunzhina, Natalia, Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform (February 6, 2020). Available at SSRN: https://ssrn.com/abstract=3533247 or http://dx.doi.org/10.2139/ssrn.3533247

Claes Bäckman

Aarhus University - Department of Business and Economics ( email )

Fuglesangs Alle 4
Aarhus, 8210
Denmark

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

Natalia Khorunzhina (Contact Author)

Copenhagen Business School - Faculty of Economics and Business Administration ( email )

Frederiksberg, DK - 2000
Denmark

HOME PAGE: http://sf.cbs.dk/nk

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