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

Posted: 7 Jan 2015

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 6, 2015

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/or 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

Suggested Citation

Cox, Ruben and Brounen, Dirk and Neuteboom, Peter, Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households (January 6, 2015). Journal of Real Estate Finance and Economics, Vol. 50, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=2545961

Ruben Cox (Contact Author)

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

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 (0) 10 4088929 (Phone)

Dirk Brounen

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 1 0408 2371 (Phone)
+31 1 0408 9017 (Fax)

HOME PAGE: http://web.eur.nl/fbk/dep/dep5/faculty/dbrounen

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
120-551-3535 (Phone)

Peter Neuteboom

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

PO Box 1738
Rotterdam, 3000 DR
Netherlands

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