Munich Personal RePEc Archive

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

Bäckman, Claes and Khorunzhina, Natalia (2020): Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform.

[img]
Preview
PDF
MPRA_paper_98524.pdf

Download (2MB) | Preview

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.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.