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Is poor financial literacy a barrier to home ownership?

Is poor financial literacy a barrier to home ownership?

John Gathergood and Joerg Weber

In this publication in the Journal of Urban Economics, John Gathergood and Joerg Weber use survey data from English and Welsh households to measure financial literacy. They found that mortgage financial literacy is generally low, and lower still among renters, and that young homeowners with poor financial literacy are more likely to take on larger debts use alternative mortgage products.

The decision to buy a home is one of the most important choices faced by a household. Most young 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 find that in the population mortgage financial literacy is generally low and among renters mortgage financial literacy is substantially worse than among homeowners. Econometric estimates show mortgage financial literacy predicts home ownership for younger, but not for older households. Financial literacy also affects the type of mortgage and leverage position of younger households. Young homeowners with poorer financial literacy take on larger mortgage debts and are more likely to use alternative mortgage products.

Journal of Urban Economics (May 2017), Financial Literacy: A barrier to home ownership for the young?, by John Gathergood and Joerg Weber www.sciencedirect.com/science/article/pii/S0094119017300062

 

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Posted on Tuesday 11th April 2017

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