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Mortgage rate choice: the effect of bank advice
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.ORCID iD: /0000-0002-4877-938
(English)Article in journal (Other academic) Submitted
Abstract [en]

Because of drastically increased home prices and debt ratios during the last decade, households in Sweden have become financially more vulnerable to changes in mortgage rates. This article attempts to explore empirically the driving forces behind mortgage choice among home owners in Sweden. Data were collected through interviews and a questionnaire directed to homebuyers in the Stockholm area. The results show three major factors influencing mortgage choice: Bank advisors and - in line with earlier findings - income and loan-to-value ratio. The importance of bank advisors for mortgage choice is a finding that, to the author’s knowledge not been established before.  There is evidence that borrowers who perceive themselves as being influenced by their bank are less likely to have adjustable rate mortgages (ARMs) thus avoiding exposure to sudden peaks in mortgage expenditure. This article provides insights for those responsible for giving advice concerning mortgages and to policy makers in connection to the ongoing discussions within the EU about rules intended to protect borrowers from irresponsible lending and to ensure that mortgages go only to those who can afford them.

National Category
Economics and Business
URN: urn:nbn:se:kth:diva-129017OAI: diva2:649196

QS 2013

Available from: 2013-09-17 Created: 2013-09-17 Last updated: 2013-09-24Bibliographically approved
In thesis
1. Essays on mortgage rate choice in Sweden
Open this publication in new window or tab >>Essays on mortgage rate choice in Sweden
2013 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Buying a home is for many households the financially most important purchase they will make. The choice of mortgage instrument is also of importance in that it will determine a household’s financial exposure. In the aftermath of the 2007–2008 financial crisis in the United States, the potential consequences for borrowers and the financial system became apparent in many countries. Even though the choice of mortgage is described as a very complex transaction, international studies have found that borrowers are less than optimally knowledgeable about the possible future consequences of their choice. This lack of knowledge has raised concern and prompted calls for more research on differences between mortgage markets and factors affecting consumers’ mortgage choice.

This thesis answers this call by empirically exploring the Swedish case and by offering an expanded knowledge about factors that influence borrowers’ mortgage choice. The thesis consists of five papers, and, in most cases, interviews and questionnaires were used to collect the data, depending on which type of data collection was considered best suited to serve the purpose of the individual paper. A close reading approach was also applied in one of the papers.

The findings indicate that in a Swedish setting, there are factors affecting borrowers’ mortgage choice that have not previously been fully explored in the literature: the media and bank advisors. During the period studied, a negative correlation existed between the media and the choice of fixed rate mortgages, whereas a positive correlation existed between bank advisors and the choice of fixed rate mortgages. The study on advice given by a bank advisor also shows the advocacy of a mix of fixed and adjustable mortgage rates. Further findings corroborate those of earlier international studies, such as the impact of income, education, financial literacy and loan-to-value ratios on mortgage choice.

A general conclusion that can be drawn from the findings in the Swedish context is that the most financially vulnerable borrowers—those with lower income, lower education and/or higher loan-to-value ratios—are more likely to choose higher levels of fixed rate mortgages (or lower levels of adjustable rate mortgages). In doing so, they avoid exposing themselves to liquidity problems, which can be caused by increasing mortgage rates, and make future mortgage expenditures more predictable. These findings contradict much of the concern that both scholars and financial authorities have expressed about households’ choice of mortgage instrument. Hence, these findings are of importance not only to research on mortgage choice but also to policymakers and the financial industry.

Place, publisher, year, edition, pages
Stockholm: KTH Royal Institute of Technology, 2013. 38 p.
, Trita-FOB-PHD, 2013:2
Mortgage choice, Swedish mortgage market, consumer characteristics, borrower perceptions, financial advice, housing co-operatives
National Category
Economics and Business
urn:nbn:se:kth:diva-129030 (URN)978-91-85783-33-5 (ISBN)
Public defence
2013-10-14, F 3, Lindstedtsvägen 26, KTH, Stockholm, 13:00 (English)

QC 20130924

Available from: 2013-09-24 Created: 2013-09-17 Last updated: 2013-09-24Bibliographically approved

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