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Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households

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  • Ruben Cox
  • Dirk Brounen
  • Peter Neuteboom

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. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Ruben Cox & Dirk Brounen & Peter Neuteboom, 2015. "Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 74-112, January.
    • Handle: RePEc:kap:jrefec:v:50:y:2015:i:1:p:74-112
    DOI: 10.1007/s11146-013-9453-9
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    3. Linda Dezső & Barna Bakó & Gábor Neszveda, 2022. "Exploiting context-dependent preferences to protect borrowers," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 27(4), pages 291-305, December.
    4. Štěpán Jurajda & Radek Janhuba, 2018. "Gender in banking and mortgage behavior," Applied Economics Letters, Taylor & Francis Journals, vol. 25(20), pages 1432-1435, November.
    5. Zhang, Dongyang & Guo, Rui, 2020. "The consumption response to household leverage in China: The role of investment at household level," International Review of Financial Analysis, Elsevier, vol. 71(C).
    6. Ying Fan & Abdullah Yavas, 2020. "How Does Mortgage Debt Affect Household Consumption? Micro Evidence from China," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(1), pages 43-88, March.
    7. James D. Shilling & Piyush Tiwari, 2021. "On Bank Pricing of Single-family Residential Home Loans: Are Australian Households Paying Too Much?​," GRU Working Paper Series GRU_2021_023, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    8. Fang, Ming & Li, Haiyang & Wang, Qin, 2021. "Risk tolerance and household wealth--Evidence from Chinese households," Economic Modelling, Elsevier, vol. 94(C), pages 885-895.
    9. Ongena, Steven & Paraschiv, Florentina & Reite, Endre J., 2023. "Counteroffers and Price Discrimination in Mortgage Lending," Journal of Empirical Finance, Elsevier, vol. 74(C).
    10. Nur Alya Afiqah Binti Mahat & Wei-Theng Lau, 2023. "Financial Literacy, Experience, Risk Tolerance and Investment Behavior: Observations during Pandemic," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 558-573, October.
    11. Jonathan D. Rose, 2018. "Contract Choice in the Interwar US Residential Mortgage Market," Working Paper Series WP-2018-13, Federal Reserve Bank of Chicago.
    12. Garmaise, Mark J., 2020. "Alternative mortgage contracts and affordability- overview by Mark J. Garmaise," Regional Science and Urban Economics, Elsevier, vol. 80(C).
    13. Devine, Kenneth & McCarthy, Yvonne & O’Toole, Conor, 2023. "The role of borrower expectations in mortgage choice," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    14. Xiaomeng Lu & Jingna Xiao & Yu Wu, 2021. "Financial literacy and household asset allocation: Evidence from micro‐data in China," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(4), pages 1464-1488, December.
    15. Barna Bakó & Gábor Neszveda & Linda Dezső, 2018. "When irrelevant alternatives do matter. The effect of focusing on loan decisions," Theory and Decision, Springer, vol. 84(1), pages 123-141, January.

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