The role of borrower expectations in mortgage choice

Abstract

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.