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Essays on mortgage rate choice in Sweden
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.ORCID iD: 0000-0002-4877-9389
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.
Series
Trita-FOB-PHD, 2013:2
Keyword [en]
Mortgage choice, Swedish mortgage market, consumer characteristics, borrower perceptions, financial advice, housing co-operatives
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-129030ISBN: 978-91-85783-33-5 (print)OAI: oai:DiVA.org:kth-129030DiVA: diva2:649248
Public defence
2013-10-14, F 3, Lindstedtsvägen 26, KTH, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

QC 20130924

Available from: 2013-09-24 Created: 2013-09-17 Last updated: 2017-03-07Bibliographically approved
List of papers
1. Mortgage rate choice: the effect of bank advice
Open this publication in new window or tab >>Mortgage rate choice: the effect of bank advice
(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
Identifiers
urn:nbn:se:kth:diva-129017 (URN)
Note

QS 2013

Available from: 2013-09-17 Created: 2013-09-17 Last updated: 2013-09-24Bibliographically approved
2. Banking advice on fixed or adjustable mortgage rates
Open this publication in new window or tab >>Banking advice on fixed or adjustable mortgage rates
2012 (English)In: Journal of Financial Services Marketing, ISSN 1363-0539, E-ISSN 1479-1846, Vol. 17, no 3, 227-241 p.Article in journal (Refereed) Published
Abstract [en]

Since the mid-1990s, Sweden has experienced a period of rapidly rising property prices, and household indebtedness has kept an even pace. The choice between fixed and adjustable interest rates has become increasingly important. This article analyses mortgage rate advice issued by a bank adviser in monthly newsletters during the period 2001-2009, focusing on the content and searching for patterns that may be related to earlier findings. The banking advice is classified into two dimensions: the content and the strength of advice. We find that a large part of the advice suggests that borrowers divide their loans and choose both adjustable and fixed interest rates. Contrary to existing literature, there is no apparent association between the advice provided and interest rate trends (neither short-nor long-term trends). Nor do we find a significant association between the advice and the interest rate gap between fixed and variable rates. This finding implies that the advice in these newsletters was formulated on a rather unclear basis and was of limited use for borrowers.

Keyword
advice, ARM, bank, FRM, household fi nance, mortgage choice
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-105258 (URN)10.1057/fsm.2012.16 (DOI)2-s2.0-84866641687 (Scopus ID)
Note

QC 20121120

Available from: 2012-11-20 Created: 2012-11-19 Last updated: 2017-12-07Bibliographically approved
3. The relationship between consumer characteristics and mortgage preferences: A case study from Sweden
Open this publication in new window or tab >>The relationship between consumer characteristics and mortgage preferences: A case study from Sweden
2012 (English)In: International Journal of Housing Markets and Analysis, ISSN 1753-8270, Vol. 6, no 2, 209-230 p.Article in journal (Refereed) Published
Abstract [en]

Purpose

– The purpose of this paper is to investigate consumer characteristics that influence Swedish consumers’ mortgage rate decisions, such as the choice between an adjustable rate mortgage (ARM) and a fixed rate mortgage (FRM).

Design/methodology/approach

– Data were collected in a randomised survey of the Swedish population in 2010. Through binary logistic regression, the effects of education, income and risk aversion on household mortgage decisions are investigated. In addition, consumers’ financial literacy and self-reported ability to handle sudden mortgage rate increases are examined. A test of gender effects is also performed.

Findings

– The results show that a lower level of education, lower income, lower financial literacy, and trouble handling interest rate increases influence Swedish consumers to choose ARMs. Gender does not significantly affect the overall results. However, a gender-divided regression shows that age, a low level of education and risk averseness significantly affect men’s mortgage choices, whereas income, trouble handling interest rate increases and low financial literacy significantly affect women’s mortgage choices.

Practical implications

– The most vulnerable Swedish consumers choose FRMs to a greater extent and, thereby, make future expenditures more predictable for the single household by reducing liquidity risks.

Originality/value

– This paper tests a number of characteristics in predicting consumers’ mortgage choices, emphasises the importance of loan takers’ ability to cope with sudden mortgage rate increases, highlights the importance of financial literacy in understanding consumers’ financial choices and elucidates the Swedish case.

Keyword
Mortgage, FRM, ARM, Personal finance, Sweden, Household
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-129018 (URN)10.1108/IJHMA-01-2012-0004 (DOI)2-s2.0-84878217512 (Scopus ID)
Note

QC 20130924

Available from: 2013-09-17 Created: 2013-09-17 Last updated: 2016-12-15Bibliographically approved
4. Borrower characteristics and mortgage choice in Sweden
Open this publication in new window or tab >>Borrower characteristics and mortgage choice in Sweden
(English)Article in journal (Other academic) Submitted
Abstract [en]

This article is an attempt to answer calls for more knowledge about the effect of consumer characteristics on mortgage choice and, in light of the U.S. mortgage crisis, calls for more information on local mortgage market practices so as to find examples that can serve as best practices for policymakers. A complementary aim is to compare the results with those reported in other countries. In addition to exploring much-studied background variables, such as age, income, LTV ratio and education, the rated importance of previous experiences with mortgages and the influence of the media and bank advisors are examined.

 

Data and methods

The data used in this study were collected through a survey, distributed among a randomised representative sample of Swedish citizens by an independent market research institute, TNS/SIFO International, to its Web panel with a representative sample of the Swedish population. To control for changes in interest rates and other external factors affecting contract factors, a time limit was set, and the survey was conducted from 27 March to 4 May 2012. Only respondents who had made an active decision concerning their mortgages in the three months leading up to their participation in the survey were to be part of the sample. Owing to survey costs, a limit was set at approximately 500 individuals.

The survey was distributed to 7,738 Web panelists, of whom 2,927 answered the survey. Of the 2,927 respondents, 2,426 were screened out because they did not comply with the survey inclusion criteria. Thus, 501 respondents were included in the study. Binary logistic regression was performed to assess the correlation of a number of contract factors and consumer characteristics and consumer perceptions of factors influencing mortgage choice of mostly FRMs. The results of this regression were compared to a set of hypotheses.

 

Results

All nine variables in the proposed model made statistically significant contributions. Five of these variables—higher age, LTV ratio, income, education and risk aversion—are positively correlated to the choice of FRMs. In these five aspects, the Swedish mortgage market also seems to be driven by the same factors as in other mortgage markets.

Contrary to what was hypothesised, households reporting low financial risk tolerance were less inclined to choose FRMs. This finding might be attributed to ARMs being marginally less expensive than FRMs during the investigated time period and to these households being unprepared to pay the risk premium inherent in FRMs.

The findings also show that the following factors have an impact on mortgage choice: consumers’ personal experiences in home buying, the influence of the media and the influence of bank advisors. The first two factors have a negative effect on the choice of FRMs, whereas the last factor is positively correlated to the choice of FRMs.

The paper suggests that in addition to the factors that are commonly investigated in connection to mortgage choice, there are other factors such as previous mortgage experience and the roles of the media and financial advisors that influence the choice between fixed and adjustable mortgages.

Keyword
mortgage choice, consumer, risk tolerance, Sweden, ARM, FRM
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-129022 (URN)
Note

QS 2013

Available from: 2013-09-17 Created: 2013-09-17 Last updated: 2013-09-24Bibliographically approved
5. Mortgage Decisions in Swedish Housing Co-operatives
Open this publication in new window or tab >>Mortgage Decisions in Swedish Housing Co-operatives
(English)Article in journal (Refereed) Accepted
Abstract [en]

Purpose – Highlights co-ops mortgage choice strategy and factors that influence the board’s master mortgage decisions in Swedish co-op associations.

Data/methodology – Data is collected through a pre-study interviewing chair persons in co-ops in Stockholm followed up by a more extensive questionnaire. Answers from these are tested by logistic regression and compared to hypotheses based on earlier international findings on mortgage choice on a household level and additional findings from the interviews.

Findings – The mortgage choice in co-ops seems to be more dependent on financial similarities than physical location. LTV ratios have a dominant influence in that co-ops with high LTV ratios have a lower preference for ARMs. When checking for location, the media and individual chair persons also seem to affect the choice. Overall, there seems to be awareness in co-ops boards about the potential financial effects of their mortgage choice.

Implications –The negative connection between high LTV ratios and ARMs implies that boards try to make their mortgage expenditure more predictable. This reduces liquidity risks which may be of importance for financially constrained owners. Findings indicate that co-ops are risk averse and that the short term threat for increasing interest costs is low. This is of value to both homebuyers and the financial industry.

Originality – This paper contributes to the mortgage choice literature by examining factors influencing mortgage choices in an organizational context such as co-op associations, to my knowledge not done before.

Keyword
Mortgage choice, master mortgage, co-op, Sweden
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-129015 (URN)
Note

QC 20130924

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

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