Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households
Posted: 7 Jan 2015
Date Written: January 6, 2015
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
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