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The impact of interest-only loans on affordability

Bäckman, Claes LU and Lutz, Chandler (2020) In Regional Science and Urban Economics 80.
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... (More)

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.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Housing affordability, Interest only mortgages, Mortgage lending
in
Regional Science and Urban Economics
volume
80
article number
103376
publisher
Elsevier
external identifiers
  • scopus:85055527502
ISSN
0166-0462
DOI
10.1016/j.regsciurbeco.2018.06.004
language
English
LU publication?
yes
id
76995277-a481-4980-bfca-fb54fe197f7d
date added to LUP
2018-12-18 08:27:50
date last changed
2020-01-15 11:58:05
@article{76995277-a481-4980-bfca-fb54fe197f7d,
  abstract     = {<p>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.</p>},
  author       = {Bäckman, Claes and Lutz, Chandler},
  issn         = {0166-0462},
  language     = {eng},
  publisher    = {Elsevier},
  series       = {Regional Science and Urban Economics},
  title        = {The impact of interest-only loans on affordability},
  url          = {http://dx.doi.org/10.1016/j.regsciurbeco.2018.06.004},
  doi          = {10.1016/j.regsciurbeco.2018.06.004},
  volume       = {80},
  year         = {2020},
}