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ABSTRACT

Alternative mortgage products have been identified by many as culprits in the financial crisis. However, because of their lower initial mortgage payments relative to loan amount, they may be a valuable tool for households that expect higher and more certain future labor income, and that wish to smooth consumption over the life-cycle. Using U.K. household-level panel data, this paper provides evidence in support of this hypothesis and highlights other important benefits of alternative mortgages, including portfolio diversification, tax benefits, and a reduction in the transaction costs incurred in housing transactions.