Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households
42 Pages Posted: 20 May 2011 Last revised: 23 Aug 2014
Date Written: May 19, 2011
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