The Effect of Financial Literacy on Mortgage Choices

A growing body of literature shows that nancial literacy a ects household savings and investment choices. Less attention has, however, been devoted to its e ect on debt behaviour. This paper contributes to lling this gap by considering how nancial literacy inuences household attitudes with respect to the most common of family debts, the house mortgage. Using Italy as a case study, it considers the e ect of nancial literacy on three mortgage-related decisions, namely, the choice of lender and the decision between adjustable and xed interest rates, as well as situations of mortgage misconduct. We nd that the more nancially literate individuals are, i) the more likely they are to shop around and compare mortgages for better economic conditions (in contrast to the less nancially literate, who tend to take on mortgages from the rst nancial intermediary they contact), ii) the more prepared they are 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.