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Mortgage design, repayment schedules, and household borrowing

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  • Bäckman, Claes
  • Moran, Patrick
  • van Santen, Peter

Abstract

How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% lower borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

Suggested Citation

  • Bäckman, Claes & Moran, Patrick & van Santen, Peter, 2024. "Mortgage design, repayment schedules, and household borrowing," SAFE Working Paper Series 421, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:297998
    DOI: 10.2139/ssrn.4854975
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    References listed on IDEAS

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    1. Ferrari, Alessandro & Loseto, Marco, 2023. "Liquidity constraints and demand for maturity the case of mortgages," Working Paper Series 2859, European Central Bank.
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      More about this item

      Keywords

      Mortgage design; Amortization payments; Macroprudential policy; Bunching;
      All these keywords.

      JEL classification:

      • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
      • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
      • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
      • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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