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

47 Pages Posted: 6 Mar 2020 Last revised: 9 Nov 2020

See all articles by Claes Bäckman

Claes Bäckman

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

Natalia Khorunzhina

Copenhagen Business School - Faculty of Economics and Business Administration

Date Written: February 6, 2020

Abstract

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

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 Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V, 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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