Limits on Mortgage Lending

Abstract

This paper aims to study the impact of macroprudential limits on mortgage lending in a heterogeneous agent life-cycle model with incomplete markets, long-term mortgages, and defaults. Using data from the Household Finance and Consumption Survey, the model is calibrated for the German economy. I consider the effects of four policy instruments: loan-to-value limit, debt-to-income limit, payment-to-income limit, and maximum maturity. I find that their effect on the homeownership rate is fairly modest. Only the loan-to-value limit significantly reduces the homeownership rate among young households. At the same time, it has the most significant positive welfare effect