The role of borrower expectations in mortgage choice

• Published in: Journal of behavioral and experimental economics 2023-12, Vol.107, p.102104, Article 102104
• Main Authors: Devine, Kenneth, McCarthy, Yvonne, O’Toole, Conor
• Format: Article
• Language: English
• Subjects: Expectations; Household finance; Mortgages
• ISSN: 2214-8043
• DOI: 10.1016/j.socec.2023.102104

This paper analyses the role of interest rate expectations in determining a household’s selection of mortgage product. We use a bespoke survey of 2,003 mortgage holders conducted by the Central Bank of Ireland to investigate the choice between safe fixed-rate and risky adjustable rate products. Our empirical methodology adopts a probit model to estimate the effect of a series of household characteristics, behavioural influences and mortgage criteria on product selection. This research provides novel insights into the determinants of mortgage choice, as our study is the first in the literature to explore expectations utilising a new measurement technique. Our results indicate that while pricing matters, future interest rate expectations are a key motivating factor in the mortgage choice decision. In addition to this, we investigate the accuracy of expectations and find higher levels of education and financial knowledge increase the probability of correct predictions. •Survey data used to capture factors behind household selection of mortgage product.•Interest rate pricing and expectations influence the type of mortgage product chosen.•Households select products aligned with their predictions of future rate movements.•Level of education or financial knowledge increases chance of correct prediction.