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Mortgage design, repayment schedules, and household borrowing

  • 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.

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Author:Claes BäckmanORCiD, Patrick MoranGND, Peter van SantenORCiDGND
URN:urn:nbn:de:hebis:30:3-715777
URL:https://ssrn.com/abstract=4854975
DOI:https://doi.org/10.2139/ssrn.4854975
Series (Serial Number):SAFE working paper (421)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2024
Year of first Publication:2024
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2024/06/07
Tag:Amortization payments; Bunching; Macroprudential policy; Mortgage design
Edition:June 2024
Page Number:72
Note:
Funding: Leibniz Institute for Financial Research SAFE
Note:
JEL-Klassifikation: G5 Household Finance / G51 Household Saving, Borrowing, Debt, and Wealth
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:E Macroeconomics and Monetary Economics / E2 Macroeconomics: Consumption, Saving, Production, Employment, and Investment / E21 Consumption; Saving; Wealth
E Macroeconomics and Monetary Economics / E6 Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
G Financial Economics / G2 Financial Institutions and Services / G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht

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