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Financial Literacy, Present Bias and Alternative Mortgage Products

Author

Listed:
  • John Gathergood
  • Jörg Weber
Abstract
Policymakers have expressed concern that some mortgage holders do not understand or correctly choose their mortgage products, especially alternative mortgage products (AMPs) with back-loaded payments. Using a specially design question module in a UK survey, we investigate the impact of consumer financial sophistication on the decision to choose an AMP over 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, suggesting they avoid paying the term premium of a fixed rate mortgage.

Suggested Citation

  • John Gathergood & Jörg Weber, 2015. "Financial Literacy, Present Bias and Alternative Mortgage Products," Discussion Papers 15/04, University of Nottingham, School of Economics.
    • Handle: RePEc:not:notecp:15/04
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    More about this item

    Keywords

    mortgage; financial literacy; present bias; alternative mortgage products JEL codes: D10; D12; G21;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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