The effect of financial literacy on mortgage choices

A growing body of literature shows that nancial literacy affects household savings and investment choices. Less attention has, however, been devoted to its effect on debt behaviour. 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, i) the more likely they are to shop aroundand compare mortgages for better economic conditions (in contrast tothe less financially literate, who tend to take on mortgages from thefirst financial intermediary they contact), ii) the more prepared theyare to diversify risks by better connecting their risk exposure with different types of mortgage, and iii) the less likely they are to experience delays in repayments.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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