Mortgage prepayments and tax-exempted intergenerational transfers: from rich parents to rich children?

The Dutch government implemented two changes to the taxation of intergenerational transfers aimed at mortgage down payments and prepayments. We identify the effects of these tax exemptions on prepayments and inter vivos transfers separately by taking advantage of the changes in policy design. The policy changes resulted in two expansions of tax-exempt transfers, which increased the probability of receiving such transfers, translating into a modest increase in prepayments. Initially, the amounts prepaid increased by a similar magnitude, while the second policy change only resulted in an increase in the amounts being transferred but not the prepayments. The macroprudential policy goal was to reduce the number of underwater mortgages, but the policy was too generic and did not help to achieve this. The prepayments triggered by the policy change increased mostly for borrowers with low original loan-to-value ratios, implying that most transfers were made from wealthy parents to housing-rich children.

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