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Mortgage prepayments and tax-exempted intergenerational transfers: from rich parents to rich children?

Working paper 751
Working Papers

Published: 23 September 2022

The Dutch government modified twice the taxation of intergenerational transfers aimed at mortgage down-payments and prepayments. We identify the causal effects of the tax exemption on prepayments and inter vivos transfers separately by exploiting changes in the policy design. Subsequent policy changes resulted in two expansions of the tax-free transfers that caused a significant increase in the probability of receiving such transfers — a relatively rare event — which translated then in a more modest increase in the probability to make prepayments, that are far more common. Initially the amounts prepaid increased by a similar magnitude, while the second expansion only increased the amounts being transferred but not the prepayments. The macroprudential policy goal of the reform was to reduce the number of underwater mortgages, at the time constituting more than onethird of all mortgages. We find that the prepayments triggered by the policy change increased mostly for borrowers with low original loan to value (LTV) ratios. This implies that most transfers were made from wealthy parents to housing-rich children. This because the policy was too generic, so it did not help to reduce the share of underwater mortgages.

Keywords: mortgage repayments; intergenerational transfers; household indebtedness;
JEL codes G5; H2

Working paper no. 751

751 - Mortgage prepayments and tax-exempted intergenerational transfers: from rich parents to rich children?

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Research highlights:

  • The Dutch government modified twice the taxation of intergenerational transfers aimed at mortgage down-payments and prepayments between 2014 and 2018. 
  • This caused a significant increase in transfers — a relatively rare event — which translated in a more modest increase in prepayments, that are far more common.
  • The macroprudential policy goal of the reform of reducing the number of underwater mortgages was not achieved, as prepayments increased mostly for borrowers with low original loan to value (LTV) ratios.
  • The present study was used in the evaluation of this policy measure, that lead to a repeal of this tax facility as of 2023. 

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