The Effects of Macroprudential and Fiscal Policy on Mortgage Debt: Evidence from the Netherlands

Abstract

This paper studies the effects of LTV limits, PTI limits and the mortgage interest deduction on mortgage debt exploiting a series of policy changes in the Netherlands. As intended, regulatory loan limits reduce mortgage leverage ratios and they also induce bunching at the loan limits. Loan limits and restrictions of the mortgage interest deduction trigger large declines in mortgage volumes. The leverage- and volume responses are larger for young, borrowing-constrained households. The repeal of the mortgage interest deduction for non-amortizing mortgages decimates the market for non-amortizing mortgages. The PTI tightening is also associated with a substantial rise in the fraction of mortgages that have very short periods during which the interest rate is fixed. This unintended risk-shifting pattern to quasi- adjustable-rate mortgages (ARM) may increase income risk. The reform of the mortgage interest deduction, which boosts amortization, is also associated with a significant decline in principal amounts at origination. Overall, this paper highlights the distributional effects as well as the unintended potential consequences of macroprudential and fiscal policies aiming to reduce mortgage debt.