The Effect of Financial Literacy on Mortgage Choices

32 Pages Posted: 27 Oct 2011

See all articles by Elsa Fornero

Elsa Fornero

University of Turin (Italy) - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); Netspar

Chiara Monticone

Organization for Economic Co-Operation and Development (OECD)

Serena Trucchi

Ca Foscari University of Venice

Date Written: September 29, 2011

Abstract

A growing body of literature shows that financial literacy affects household savings and investment choices. Less attention has, however, been devoted to its effect on debt behavior. This paper contributes to filling this gap by considering how financial literacy influences household attitudes with respect to the most common of family debts, the house mortgage. Using Italy as a case study, it considers the effect of financial literacy on three mortgage-related decisions, namely, the choice of lender and the decision between adjustable and fixed interest rates, as well as situations of mortgage misconduct. We find that the more financially literate individuals are, the more likely they are to shop around and compare mortgages for better economic conditions (in contrast to the less financially literate, who tend to take on mortgages from the first financial intermediary they contact), the more prepared they are to diversify risks by better connecting their risk exposure with different types of mortgage, and the less likely they are to experience delays in repayments.

Suggested Citation

Fornero, Elsa and Monticone, Chiara and Trucchi, Serena, The Effect of Financial Literacy on Mortgage Choices (September 29, 2011). Netspar Discussion Paper No. 09/2011-085, Available at SSRN: https://ssrn.com/abstract=1950040 or http://dx.doi.org/10.2139/ssrn.1950040

Elsa Fornero (Contact Author)

University of Turin (Italy) - Department of Economics and Statistics ( email )

Via Po, 53
Torino, 10124
Italy
+39-011-6706076 (Phone)

Center for Research on Pensions and Welfare Policies (CeRP)

Via Real Collegio, 30
Moncalieri, Turin
Italy

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Chiara Monticone

Organization for Economic Co-Operation and Development (OECD)

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Serena Trucchi

Ca Foscari University of Venice

Dorsoduro 3246
Venice, Veneto 30123
Italy

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