50 Pages Posted: 6 Jun 2015 Last revised: 8 May 2017
Date Written: January 1, 2017
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: 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