Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform
44 Pages Posted: 6 Mar 2020
Date Written: February 6, 2020
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: Suggested Citation