Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129828
Authors: 
Gathergood, John
Weber, Jörg
Year of Publication: 
2015
Series/Report no.: 
CeDEx Discussion Paper Series 2015-15
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 'nterest-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, suggesting they avoid paying the term premium of a fixed rate mortgage.
Subjects: 
mortgages
financial literacy
present bias
alternative mortgage products
JEL: 
D10
D12
G21
Document Type: 
Working Paper

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