Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households

Ruben Cox, Dirk Brounen and Peter Neuteboom

The Journal of Real Estate Finance and Economics, 2015, vol. 50, issue 1, 74-112

Abstract: 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 % 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. Copyright Springer Science+Business Media New York 2015

Keywords: Financial Literacy; Mortgage Choice; Risk Aversion; Alternative Mortgage Products (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11146-013-9453-9

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