Responses to Saving Commitments: Evidence from Mortgage Run-offs

  • Steffen Andersen Steffen Andersen
  • Jimmy Martínez-Correa Jimmy Martínez-Correa
  • Philippe D'Astous Philippe D'Astous
  • Stephen H. Shore Stephen H. Shore

We study how individuals respond to the removal of a saving constraint. Mortgage run-offs predictably relax a saving constraint for borrowers who chose mortgage contracts that committed them to effectively save by paying down mortgage principal. Using the universe of the Danish population, we identify individuals whose mortgages were on track to run off between 1995 and 2014. We measure the effect of run-offs on earnings and the household balance sheet to understand the importance of relaxing a saving constraint and the mechanisms individuals use to circumvent it. We find that on average, borrowers use 39 percent of the resources previously devoted to mortgage payments to decrease labor income, and use 53 percent to pay down other debts. Borrowers run up non-mortgage debt prior to the run-off and this run up stops once the mortgage is repaid.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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