Interest‐only Mortgages and Consumption Growth: Evidence From a Mortgage Market Reform

Abstract

We use 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 households more likely to use an interest‐only mortgage to relax their mortgage‐payment constraint increased consumption following the reform. This increase in consumption is financed by borrowing at the time of refinancing and by borrowers with lower pre‐reform leverage and higher needs for liquidity. We find even larger post‐reform consumption growth for the leverage‐constrained homeowners through house‐price growth stimulated by the reform.This article is protected by copyright. All rights reserved