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Evidence on the Benefits of Alternative Mortgage Products

Authors

  • JOÃO F. COCCO

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    • João F. Cocco is at the London Business School, Centre for Economic Policy Research, Center for Financial Studies, and Netspar. A previous version of this paper circulated under the title “Understanding the Trade-offs of Alternative Mortgage Products.” I would like to thank Francisco Gomes, Luigi Guiso, Bent Sorensen, and seminar participants at the Center for Financial Studies Conference on Household Finance, Erasmus University, London Business School, the Sveriges Riksbank, and the U.K. Financial Services Authority for comments, and the U.K. Data Archive for making the data available. I am especially grateful to an anonymous referee, an anonymous Associate Editor, and to Campbell Harvey (the Editor) for many comments that greatly improved the paper. The usual disclaimer applies.


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.

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