Mortgage Design, Repayment Schedules, and Household Borrowing

Abstract: We study how debt repayment schedules affect household borrowing. 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 a 5% reduction in borrowing. Wealthy, unconstrained borrowers drive the results, challenging liquidity constraints as the main explanation. A standard life-cycle model and a model with fixed one-time cost of amortizing fail to match key empirical results. We instead find support for an ongoing flow disutility to amortization. Our results suggest that interest-only mortgages products may increase household borrowing and the lifetime cost of debt.