Financial literacy,present bias and alternative mortgage products |
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| Institution: | 1. University of Nottingham, School of Economics Network for Integrated Behavioural Science, Nottingham NG72RD, United Kingdom;2. University of Nottingham, School of Economics Centre for Decision Research and Experimental Economics Network for Integrated Behavioural Science, Nottingham NG72RD, United Kingdom;1. Emmett Interdisciplinary Program in Environment and Resources, Stanford University, 473 Via Ortega, Suite 226, Stanford, CA 94305, USA;2. Montpellier SupAgro, Les Unités Mixtes de Recherche 1135 Laboratoire d’Economie Expérimentale de Montpellier, F-34000 Montpellier, France;1. Swedish House of Finance at the Stockholm School of Economics, Drottninggatan 98, Stockholm SE-111 60, Sweden;2. LinkedIn Corporation, 2029 Stierlin Ct, Mountain View, CA 94043, United States;3. Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, United States |
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| 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. |
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