The impact of interest-only loans on affordability

Research output: Contribution to journalArticle

Abstract

We study the 2000s Danish legalization of interest-only (IO) loans, a mortgage market innovation aimed at increasing affordability and homeownership rates for cash-strapped buyers by substantially reducing first-year payments. Our results show that IO mortgages rapidly became popular in regions with higher house prices pre-treatment as well as with both the targeted cash-strapped borrowers and mortgage applicants spanning the wealth and income distributions. Just three years after policy implementation, IO mortgages constituted half of all outstanding Danish mortgages. The introduction of IO loans thus led to an increase in housing turnover and transactions. However, as these increases were dispersed across the distribution of homeowners, they did not lead to any changes in homeownership rates for the targeted group or allow any underserved buyer groups to enter the market. Broadly, our policy analysis documents how reforms targeting housing affordability and inequality can be exploited by the wider population, limiting intended effects.

Details

Authors
Organisations
External organisations
  • United States Securities and Exchange Commission
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • Housing affordability, Interest only mortgages, Mortgage lending
Original languageEnglish
Article number103376
JournalRegional Science and Urban Economics
Volume80
Early online date2018
Publication statusPublished - 2020 Jan
Publication categoryResearch
Peer-reviewedYes