Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households
Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)
Erasmus University Rotterdam (EUR) - Department of Financial Management; Erasmus Research Institute of Management (ERIM); Tinbergen Institute
Erasmus University Rotterdam (EUR) - Department of Financial Management
May 19, 2011
We analyze how financial literacy and risk aversion impact a household’s choice of mortgage type. Our results show that those households who report higher levels of literacy and lower risk aversion are significantly more likely to opt for interest-only mortgages. The results are robust to alternative explanations such as involvement of financial advisors, the effect of peers, experience with prior homeownership, and house price expectations. In general, alternative mortgage products are chosen by wealthier, older and more sophisticated households, who are also more likely to have understanding of risks and benefits associated with these products.
Number of Pages in PDF File: 45
Keywords: mortgages, financial literacy, risk aversion, household finance
JEL Classification: D14, G21, R20working papers series
Date posted: May 20, 2011 ; Last revised: October 25, 2011
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