Mortgage Design, Repayment Schedules, and Household Borrowing

Claes Bäckman; Patrick Moran; Peter van Santen

doi:10.1093/rfs/hhaf115

Mortgage Design, Repayment Schedules, and Household Borrowing

Claes Bäckman¹; Patrick Moran^2,3; Peter van Santen⁴

¹ Leibniz Institute for Financial Research SAFE · ² Federal Reserve Board, United States, Institute for Fiscal Studies , , and , · ³ CEBI , , and , · ⁴ University of Groningen

Review of Financial Studies 2025

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.

DOI: 10.1093/rfs/hhaf115
Language: en
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