Financial literacy, risk aversion and choice of mortgage type by households

R. Cox, Dirk Brounen, P. Neuteboom

Research output: Contribution to journalArticleScientificpeer-review

14 Citations (Scopus)

Abstract

This paper analyzes how financial literacy and reported willingness to take
financial risk impact a household’s choice of mortgage type. The results show that
households reporting higher financial literacy and lower risk aversion are 55 to 97 % more likely to opt for interest-only mortgages. The results are robust to alternative explanations such as the involvement of financial advisors, the effect of peers, experience with prior home-ownership, and house price expectations. In general, alternative mortgage products, as opposed to traditional mortgages, are chosen by wealthier, older, and/or more sophisticated households that are more likely to have a greater understanding of the risks and benefits associated with these products.
Original languageEnglish
Pages (from-to)74-112
JournalJournal of Real Estate Finance and Economics
Volume50
Issue number1
DOIs
Publication statusPublished - 8 Jan 2015

Keywords

  • Financial literacy
  • Mortgage choice
  • Risk aversion
  • Alternative mortgage products

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