The Mortgage Piggy Bank: Building Wealth through Amortization

Mortgage amortization schedules are among the largest savings plans in the world (e.g. U.S. households contribute hundreds of billions of dollars annually to these “mortgage piggy banks”). However, little is known about their effects on wealth accumulation. Ex-ante, effects are unclear. It depends on the fungibility of home equity and other savings, and households’ willingness to adjust consumption or leisure. Empirically, effects are difficult to identify since amortization and other savings choices are typically codetermined. We overcome this challenge by utilizing a 2013 Dutch reform that increased amortization requirements for new mortgages. Using detailed administrative data, we compare savings decisions for home-buyers right before or after the reform. We use plausibly exogenous variation in the timing of home purchase coming from life-events (e.g. birth of a child) to address selection concerns. Dynamic difference-in- difference estimates support the parallel trend assumption. We find that marginal wealth-building from amortization (MWA) is substantial. Remarkably, households leave other savings untouched and cut consumption and leisure instead, implying a near 1-for-1 rise in net-worth. Results hold at least five years out when additional amortization-induced home equity is larger than other savings. The effect is ubiquitous, holding for unconstrained households, who could easily offset additional amortization, and movers, suggesting a broad applicability of our results. Consistent with a simple model, we do find that estimates are lower for households who appear less financially sophisticated or less willing to adjust short-term consumption. Overall, our results highlight the critical importance of mortgage amortization for household wealth-building and macroprudential policies.