The Effect of Financial Literacy on Mortgage Choices
32 Pages Posted: 27 Oct 2011
Date Written: September 29, 2011
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.
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