Responses to Savings Commitments: Evidence from Mortgage Run-offs

Steffen Andersen, Philippe d’Astous, Jimmy Martínez-Correa and Stephen H. Shore
Working paper #1
Retirement and Savings Institute – April 2018

We study consumers’ responses to removing a saving constraint. In particular, we look at mortgage run-offs, which occurs when borrowers pay off their mortgages. With the “forced savings” aspect of mortgage payments removed (the capital repayment portion), we measure the effect of run-offs on earnings and the household balance sheet. Using the entire Danish population, we identify mortgages on track to run off between 1995 and 2014. We find that borrowers use 39 percent of previous mortgage payments to decrease labour 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.