A debt-to-income cap would dampen economic fluctuations

Abstract

How would the economy react in the long term if the maximum size of housing loans granted by banks were tied to the customer's income instead of the value of the dwelling to be purchased? This question can be examined using the Bank of Finland's general equilibrium model. Based on analysis, the introduction of a maximum debt-to-income ratio, i.e. a debt-to-income cap, would have a moderate impact on long-term economic growth. A debt-to-income cap could, however, dampen economic fluctuations relative to the current loan-to-value cap.