CFCM 15/16: Is Poor Financial Literacy a Barrier to Home Ownership?

Abstract

The decision to buy a home is one of the most important choices faced by a household.  Most households who purchase a home do so using a mortgage. But mortgages are complex financial instruments and this complexity may be a barrier to less sophisticated households becoming homeowners. Using survey data from a sample of English and Welsh households we measure household financial literacy related to mortgages, including concepts such as loan duration, interest compounding and amortization. We also measure time preference and risk attitude. We find that in the population mortgage financial literacy is generally low, as on average only two out of four questions are answered correctly. Among renters, mortgage financial literacy is substantially worse than among homeowners and this difference is not explained by socio-economic factors. Econometric estimates suggest mortgage financial literacy predicts home ownership, but instrumental variable estimates show that mortgage financial literacy is acquired endogenously with housing tenure choices.

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Authors

John Gathergood and Jörg Weber

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