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Financial literacy, present bias and alternative mortgage products

Gathergood, John; Weber, Jörg

Authors

Jörg Weber



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.

Journal Article Type Article
Publication Date 2017-05
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Electronic ISSN 1872-6372
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 78
Pages 58-83
APA6 Citation Gathergood, J., & Weber, J. (2017). Financial literacy, present bias and alternative mortgage products. Journal of Banking and Finance, 78, 58-83. https://doi.org/10.1016/j.jbankfin.2017.01.022
DOI https://doi.org/10.1016/j.jbankfin.2017.01.022
Keywords mortgages, financial literacy, present bias, alternative mortgage products
Publisher URL http://www.sciencedirect.com/science/article/pii/S0378426617300316
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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