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Mortgage Product Innovation in Advanced Economies: More Choice, More Risk

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  • Kathleen Scanlon
  • Jens Lunde
  • Christine Whitehead

Abstract

In many developed countries, house prices have been rising rapidly, mortgage debt has been increasing and affordability has worsened. It is in this context that the standard annuity mortgage is increasingly being supplanted by mortgages with non-standard features, such as longer terms or interest-only payments. Many of these new features aim to reduce the borrower's monthly debt service in the initial period of the loan. While these new mortgage types help households to enter owner-occupation and to vary their expenditure patterns, the long-term cost to the borrower cannot normally be less than for a standard product. Moreover, such mortgages can also be more risky: the interest-only borrower does not accumulate equity as an annuity borrower does, and loans with longer terms expose the borrower to greater risk of interest-rate or other economic shocks. As a result both borrowers pay more and the housing finance system may be more fragile. This paper brings together evidence from 13 developed countries about house prices, debt and affordability, and particularly the availability and market share of mortgages with these new features. It analyses trends over the last ten years and discusses the risks of these mortgages compared to standard annuity products.

Suggested Citation

  • Kathleen Scanlon & Jens Lunde & Christine Whitehead, 2008. "Mortgage Product Innovation in Advanced Economies: More Choice, More Risk," European Journal of Housing Policy, Taylor and Francis Journals, vol. 8(2), pages 109-131.
    • Handle: RePEc:taf:eurjhp:v:8:y:2008:i:2:p:109-131
    DOI: 10.1080/14616710802037359
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    Cited by:

    1. Aitziber Etxezarreta Etxarri & Gala Cano Fuentes & Joris Hoekstra & Kees Dol, 2013. "Análisis multiescalar de la burbuja inmobiliaria y los desahucios: La Comunidad Autónoma de Euskadi en el contexto estatal y europeo," Revista de Estudios Regionales, Universidades Públicas de Andalucía, vol. 3, pages 51-76.
    2. Karin Haldrup, 2017. "On security of collateral in Danish mortgage finance: a formula of property rights, incentives and market mechanisms," European Journal of Law and Economics, Springer, vol. 43(1), pages 1-29, February.
    3. T. van der Valk, 2019. "Quid pro quo: the institutional environment and the allocation of household wealth," Working Papers 19-25, Utrecht School of Economics.
    4. Emilia Lorenzo & Gabriella Piscopo & Marilena Sibillo & Roberto Tizzano, 2021. "Reverse mortgages through artificial intelligence: new opportunities for the actuaries," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 23-35, June.
    5. V. D’Amato & E. Lorenzo & S. Haberman & M. Sibillo & R. Tizzano, 2021. "Pension schemes versus real estate," Annals of Operations Research, Springer, vol. 299(1), pages 797-809, April.
    6. Caroline Dewilde, 2018. "Explaining the declined affordability of housing for low-income private renters across Western Europe," Urban Studies, Urban Studies Journal Limited, vol. 55(12), pages 2618-2639, September.
    7. Philipp M Lersch & Wilfred Uunk, 2017. "The shadow of future homeownership: the association of wanting to move into homeownership with labour supply," Work, Employment & Society, British Sociological Association, vol. 31(3), pages 522-541, June.
    8. 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.
    9. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    10. Susan J Smith & Melek Cigdem & Rachel Ong & Gavin Wood, 2017. "Wellbeing at the edges of ownership," Environment and Planning A, , vol. 49(5), pages 1080-1098, May.
    11. Chmelar, Ales, 2013. "Household Debt and the European Crisis," ECRI Papers 8239, Centre for European Policy Studies.
    12. Andreas Merikas & Anna Merika & Nikiforos Laopodis & Anna Triantafyllou, 2012. "House Price Comovements in the Eurozone Economies," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 71-98.
    13. Christine Whitehead, 2012. "Discussion of Property Market Cycles as Paths to Financial Distress," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Frank Packer & Callan Windsor (ed.),Property Markets and Financial Stability, Reserve Bank of Australia.
    14. Irfan Ahmed & Shahid Mahmood & Umar Farooq, 2012. "Determinant Attributes of Customer Choice of Banks, Supplying Mortgage Products," Journal of Economics and Behavioral Studies, AMH International, vol. 4(5), pages 287-296.
    15. Ebner, André, 2013. "A micro view on home equity withdrawal and its determinants: Evidence from Dutch households," Journal of Housing Economics, Elsevier, vol. 22(4), pages 321-337.
    16. N. Kundan Kishor & Hardik A. Marfatia, 2017. "The Dynamic Relationship Between Housing Prices and the Macroeconomy: Evidence from OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 237-268, February.
    17. Gill, Balbinder Singh, 2024. "COVID-19 mortality risk premium and the interest rate on mortgage loans," International Review of Financial Analysis, Elsevier, vol. 93(C).
    18. Richard Waldron & Declan Redmond, 2016. "Stress in Suburbia: Counting the Costs of Ireland's Property Crash and Mortgage Arrears Crisis," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 107(4), pages 484-501, September.
    19. Karpestam, Peter & Johansson, Sebastian, 2019. "Interest-only-mortgages and housing market fluctuations in Denmark," Journal of Housing Economics, Elsevier, vol. 46(C).
    20. Giulia M Dotti Sani & Claudia Acciai, 2018. "Two hearts and a loan? Mortgages, employment insecurity and earnings among young couples in six European countries," Urban Studies, Urban Studies Journal Limited, vol. 55(11), pages 2451-2469, August.
    21. Shi, Xinyan & Riley, Sarah F., 2014. "Mortgage choice, house price externalities, and the default rate," Journal of Housing Economics, Elsevier, vol. 26(C), pages 139-150.
    22. Gill, Balbinder Singh, 2023. "Health uninsurance premium and mortgage interest rates," International Review of Financial Analysis, Elsevier, vol. 87(C).
    23. Troy, Laurence & Wolifson, Peta & Buckley, Amma & Buckle, Caitlin & Adkins, Lisa & Bryant, Gareth & Konings, Martijn, 2023. "Pathways to home ownership in an age of uncertainty," SocArXiv vstm4, Center for Open Science.
    24. Yeorim Kim & Mauro Mastrogiacomo, 2024. "Residual-debt insurance and mortgage repayments," Working Papers 823, DNB.
    25. Damen, Sven & Vastmans, Frank & Buyst, Erik, 2016. "The effect of mortgage interest deduction and mortgage characteristics on house prices," Journal of Housing Economics, Elsevier, vol. 34(C), pages 15-29.

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