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Amortization requirements and household indebtedness: An application to Swedish-style mortgages

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  • Hull, Isaiah

Abstract

Since the mid-1990s, many OECD countries have experienced a substantial increase in household indebtedness. Sweden, in particular, has seen indebtedness rise from 90% of disposable income in 1995 to 179% in 2015. The Swedish Financial Supervisory Authority (FSA) has identified mortgage amortization requirements as a potential instrument for reducing indebtedness; and has drafted guidelines that will intensify the rate and duration of amortization. In this paper, I characterize Swedish-style mortgage contracts, which differ substantially from U.S.-style contracts. I then evaluate the policy changes in an incomplete markets model with three types of debt and a novel mortgage contract specification that is calibrated to match Swedish micro and macro data. I find that intensifying the rate and duration of amortization is largely ineffective at reducing indebtedness in a realistically-calibrated model. In the absence of tight restrictions on the maximum debt-service-to-income ratio or implausibly large refinancing costs, the policy impact is small in aggregate, over the lifecycle, and across employment statuses.

Suggested Citation

  • Hull, Isaiah, 2017. "Amortization requirements and household indebtedness: An application to Swedish-style mortgages," European Economic Review, Elsevier, vol. 91(C), pages 72-88.
    • Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:72-88
    DOI: 10.1016/j.euroecorev.2016.09.011
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    Cited by:

    1. Sami Alpanda & Hyunji Song & Sarah Zubairy, 2021. "Household Debt and the Effects of Fiscal Policy," Working Papers 20210928-001, Texas A&M University, Department of Economics.
    2. Mr. Lars E. O. Svensson, 2016. "Amortization Requirements May Increase Household Debt: A Simple Example," IMF Working Papers 2016/083, International Monetary Fund.
    3. Claes Bäckman & Natalia Khorunzhina, 2024. "Interest‐Only Mortgages And Consumption Growth: Evidence From A Mortgage Market Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 1049-1079, May.
    4. PROSKUROVSKA Anetta & DÖRRY Sabine, 2018. "Is a Blockchain-based conveyance system the next step in the financialisation of housing? The case of Sweden," LISER Working Paper Series 2018-17, Luxembourg Institute of Socio-Economic Research (LISER).
    5. Karpestam, Peter & Johansson, Sebastian, 2019. "Interest-only-mortgages and housing market fluctuations in Denmark," Journal of Housing Economics, Elsevier, vol. 46(C).
    6. Svensson, Lars E.O., 2020. "Macroprudential Policy and Household Debt: What is Wrong with Swedish Macroprudential Policy?," CEPR Discussion Papers 14585, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Mortgages; Amortization; Heterogeneous Agents; Incomplete Markets; Financial Regulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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