Financial Literacy, Present Bias and Alternative Mortgage Products

50 Pages Posted: 6 Jun 2015 Last revised: 8 May 2017

John Gathergood

University of Nottingham - School of Economics

Joerg Weber

University of Nottingham - School of Economics; University of Nottingham - Centre for Decision Research and Experimental Economics

Date Written: January 1, 2017

Abstract

Choosing a mortgage is one of the most important financial decisions made by a household. Financial innovation has given rise to more complex mortgage products with back-loaded payments, known as ‘Alternative Mortgage Products’ (AMPs), or ‘Interest-Only Mortgages’. Using a specially designed question module in a representative survey of UK mortgage holders, we investigate the effect of consumer financial sophistication on the decision to choose an AMP instead of a standard repayment mortgage. We show poor financial literacy and present bias raise the likelihood of choosing an AMP. Financially literate individuals are also more likely to choose an Adjustable Rate Mortgage (ARM), suggesting they avoid paying the term premium of a fixed rate mortgage.

Keywords: Mortgages; Financial literacy; Present bias; Alternative mortgage products

JEL Classification: D10; D12; G21

Suggested Citation

Gathergood, John and Weber, Joerg, Financial Literacy, Present Bias and Alternative Mortgage Products (January 1, 2017). Journal of Banking & Finance, Vol. 78, May 2017, Pages 58–83, doi.org/10.1016/j.jbankfin.2017.01.022.. Available at SSRN: https://ssrn.com/abstract=2614888 or http://dx.doi.org/10.2139/ssrn.2614888

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://https://sites.google.com/site/gathergoodjohn/

Joerg Weber

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 (0)115 95 15870 (Phone)

University of Nottingham - Centre for Decision Research and Experimental Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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