Feeling comfortable with a mortgage: The impact of framing, financial literacy and advice

Abstract

The family home is the most important asset on household balance sheets, aside from human capital. Choosing a suitable mortgage is therefore critical to financial well-being but households often make costly mistakes. We collect data in an online survey to test borrowers’ comfort with, and understanding of, mortgage debt. We analyze the impact of financial literacy, mortgage broker advice and whether the loan is framed as a lump sum debt or an equivalent stream of repayments. We conjecture that participants’ comfort with loans and their ability to match lump sum debt to equivalent repayment streams will help them to choose a suitable mortgage. Results show that participants with high financial literacy are less comfortable with mortgage debt in general and also less sensitive to framing than those with low financial literacy. Literate participants are better able to match repayment streams with the equivalent lump sums. Endogeneity-controlled regression analysis shows that consulting brokers leads to higher comfort with debt and lower sensitivity to framing. Survey responses also indicate more uncertainty about future house prices among borrowers who intend to consult brokers than among those who do not.

The importance of financial literacy and its impact on financial wellbeing

“…The paper by Torp et al (2023) helps us to shed light on decisions related to mortgages. In a series of randomly assigned tasks, the authors assessed participants' subjective comfort with a range of home loan amounts, framed as lump sum debts or equivalent repayment streams.…”