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.
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 language | English |
|---|---|
| Pages (from-to) | 74-112 |
| Journal | Journal of Real Estate Finance and Economics |
| Volume | 50 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 8 Jan 2015 |
Keywords
- Financial literacy
- Mortgage choice
- Risk aversion
- Alternative mortgage products