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The impact of interest-only loans on affordability

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  • Bäckman, Claes
  • Lutz, Chandler

Abstract

We study the 2000s Danish legalization of interest-only (IO) loans, a mortgage market innovation aimed at increasing affordability and homeownership rates for cash-strapped buyers by substantially reducing first-year payments. Our results show that IO mortgages rapidly became popular in regions with higher house prices pre-treatment as well as with both the targeted cash-strapped borrowers and mortgage applicants spanning the wealth and income distributions. Just three years after policy implementation, IO mortgages constituted half of all outstanding Danish mortgages. The introduction of IO loans thus led to an increase in housing turnover and transactions. However, as these increases were dispersed across the distribution of homeowners, they did not lead to any changes in homeownership rates for the targeted group or allow any underserved buyer groups to enter the market. Broadly, our policy analysis documents how reforms targeting housing affordability and inequality can be exploited by the wider population, limiting intended effects.

Suggested Citation

  • Bäckman, Claes & Lutz, Chandler, 2020. "The impact of interest-only loans on affordability," Regional Science and Urban Economics, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:regeco:v:80:y:2020:i:c:s0166046217303903
    DOI: 10.1016/j.regsciurbeco.2018.06.004
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    More about this item

    Keywords

    Interest only mortgages; Housing affordability; Mortgage lending;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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