Labour and Public Policy Seminar: Claes Bäckman, Lund University

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

2018.05.14 | Bodil Krog

Date Fri 21 Sep
Time 12:15 13:00
Location Fuglesangs Allé 4, 8210 Aarhus V, building 2621(B), room 04

Presenter: Claes Bäckman, Lund University

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

Abstract: We use detailed household-level data from Denmark to show that the introduction of interest-only mortgage allowed households constrained by their mortgage payments to increase consumption and borrowing. Using an ex-ante measure of exposure motivated by theories of financial constraints, we show that households with higher exposure were more likely to refinance to the interest-only mortgage and that they increased their consumption more following the reform. We find that interest-only mortgage is popular across the income and age distributions, suggesting that this type of financial innovation affects a large share of the population. Finally, we show that the increased prevalence of interest-only mortgage can lead to bias in the estimation of housing wealth effects.

Host: Juan Carlos Parra-Alvarez

Organizer: Maria Humlum

Labour and Public Policy Seminars