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
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 percent 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 more sophisticated households that are more likely to have a greater understanding of the risks and benefits associated with these products.
Number of Pages in PDF File: 42
Keywords: Financial Literacy, Mortgage Choice, Risk Aversion, Alternative Mortgage Products
JEL Classification: D14, G21, R20working papers series
Date posted: May 20, 2011 ; Last revised: June 3, 2013
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