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

Cox, Ruben; Brounen, Dirk; Neuteboom, Peter

doi:10.2139/ssrn.1846318

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

Journal of Real Estate Finance and Economics, Forthcoming

42 Pages Posted: 20 May 2011 Last revised: 23 Aug 2014

See all articles by Ruben Cox

Ruben Cox

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Dirk Brounen

Erasmus University Rotterdam (EUR) - Department of Financial Management; Erasmus Research Institute of Management (ERIM); Tinbergen Institute

Peter Neuteboom

Erasmus University Rotterdam (EUR) - Department of Financial Management

There are 2 versions of this paper

Date Written: May 19, 2011

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 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.

Keywords: Financial Literacy, Mortgage Choice, Risk Aversion, Alternative Mortgage Products

JEL Classification: D14, G21, R20

Suggested Citation: Suggested Citation

Cox, Ruben and Brounen, Dirk and Neuteboom, Peter, Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households (May 19, 2011). Journal of Real Estate Finance and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1846318 or http://dx.doi.org/10.2139/ssrn.1846318