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Abstract
Mortgage repayments make up 30% of Euro-area household saving flows. I show that fixed amortization schedules, mandatory in most countries, induce wealth accumulation through debt repayment but limit consumption smoothing. In a life-cycle model with uninsurable income risk and illiquid home equity, costly deviation from scheduled repayment forces constrained homeowners to cut consumption and liquid saving. In the data, homebuyers are constrained: starting with large mortgages and little cash, they save more than renters (including debt repayment) but accumulate less liquid wealth. I exploit a 2013 Dutch policy change that made previously-free flexible repayment costly through tax incentives. Homebuyers accelerated repayment and built less liquid buffers. The model matches these patterns and shows mandatory amortization increases the share of hand-to-mouth households by 15 percentage points, amplifying financial wealth inequality. Welfare losses, at 2–3% of lifetime consumption – equivalent to working an extra year before retirement – are concentrated among lower-income households.
