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Spending Response to a Predictable Increase in Mortgage Repayments: Evidence from Expiring Interest-Only Loans

Author

Listed:
  • Henrik Yde Andersen

    (Danmarks Nationalbank)

  • Stine Ludvig Bech

    (Danmarks Nationalbank)

  • Alessia De Stefani

    (International Monetary Fund)

Abstract

We study how homeowners' consumption responds to a negative and anticipated disposable income shock: the beginning of the amortization period on interest-only mortgages. We identify spending behavior through an event study approach, by matching loan-level data that covers the universe of Danish mortgages to detailed administrative registries on borrowers. In response to an average increase in installments worth 9% of income, consumption drops by 3% of income, when amortization begins. The reduction in expenditure is persistent. Borrowers who fail to smooth consumption are highly leveraged and likely to be denied a new interest-only loan, upon expiration.

Suggested Citation

  • Henrik Yde Andersen & Stine Ludvig Bech & Alessia De Stefani, 2024. "Spending Response to a Predictable Increase in Mortgage Repayments: Evidence from Expiring Interest-Only Loans," The Review of Economics and Statistics, MIT Press, vol. 106(1), pages 277-285, January.
    • Handle: RePEc:tpr:restat:v:106:y:2024:i:1:p:277-285
    DOI: 10.1162/rest_a_01146
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