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How Do Interest-Only Mortgages Affect Consumption and Saving over the Life Cycle?

Author

Listed:
  • Linda Sandris Larsen

    (PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark)

  • Claus Munk

    (PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark)

  • Rikke Sejer Nielsen

    (PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark)

  • Jesper Rangvid

    (PeRCent and the Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark)

Abstract

Using a unique data set with detailed information on Danish households and their mortgages, we show that young and old households are more likely to use interest-only (IO) mortgages compared with middle-aged households. Young households use IO mortgages because they expect higher future income and old households because IO mortgages allow them to circumvent an otherwise binding liquidity constraint. Through different channels, IO mortgages thus facilitate consumption smoothing for young and old households. Our detailed data also allow us to examine how households with IO mortgages differ from households with repayment mortgages in terms of leverage, debt and asset composition, and pension contributions.

Suggested Citation

  • Linda Sandris Larsen & Claus Munk & Rikke Sejer Nielsen & Jesper Rangvid, 2024. "How Do Interest-Only Mortgages Affect Consumption and Saving over the Life Cycle?," Management Science, INFORMS, vol. 70(3), pages 1970-1991, March.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1970-1991
    DOI: 10.1287/mnsc.2023.4787
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