The Mortgage Illusion

104 Pages Posted: 4 Jun 2016 Last revised: 26 Sep 2018

See all articles by Nelson Camanho

Nelson Camanho

School of Economics and Finance, Queen Mary University of London

Daniel Fernandes

Catholic University of Portugal

Date Written: September 19, 2018

Abstract

We propose and test a new heuristic on the decision to buy or rent a house: the mortgage illusion, in which potential home buyers are influenced by the comparison between the monthly rental payment and the monthly mortgage installment, for fixed rate mortgages. We find experimental evidence that home buyers are more likely to buy when the monthly rental payment is higher than the monthly mortgage installment. Our experimental designs and results are robust to ownership bias and home buyers’ budget constraints. Financial literacy and numeracy do not help to overcome the mortgage illusion.

Keywords: mortgages, household decisions, experiment, behavioral finance

JEL Classification: C91, D12, G02, G21

Suggested Citation

Camanho, Nelson and Fernandes, Daniel, The Mortgage Illusion (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=1856325 or http://dx.doi.org/10.2139/ssrn.1856325

Nelson Camanho (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Daniel Fernandes

Catholic University of Portugal ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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