Mortgage Market Design and Wealth Inequality: Evidence from Interest-only Mortgages

Abstract

Mortgage amortization payments require household to save and build up wealth in the form of home equity, but also restricts portfolio choice. Using a mortgage market reform in Denmark, we show that interest-only mortgages are U-shaped across the wealth distribution. Across the wealth distribution, households chose to save less after choosing interest-only mortgages. Overall, our results highlight that mortgage market design affects savings and wealth for a large fraction of households.