Interest Rate Risk Perception in Households’ Mortgage Choice Decision

Abstract

This paper examines households’ interest rate risk perception when choosing between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs).

The empirical analysis, carried out on the basis of data from the Survey on Household Income and Wealth by the Bank of Italy, highlights pervasive biased behaviours. First, the FRM-ARM choice appears to be influenced by the prospect of immediate savings. Second, due to households’ short term view, as the maturity is extended and the borrower’s risk is increased, then the preference for ARMs increases. Third, lending policies have a considerable impact on the FRM-ARM choice.

Keywords: interest rate risk, mortgage choice, adjustable rate

JEL Classification: G14, G21