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Financial illiteracy and mortgage refinancing decisions

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  • Bajo, Emanuele
  • Barbi, Massimiliano

Abstract

We analyze the effect of an exogenous shock to the Italian mortgage market, where a reform has abolished prepayment fees and simplified mortgage refinancing, making it a virtually cost-free decision for households. This law, along with the considerable drop in market interest rates, has generated important gains for fixed-rate borrowers, which we quantify at up to 15% of the principal balance. Nevertheless, only about 13% of borrowers have locked in this opportunity. We study the relationship between this sluggish behavior and their level of financial literacy.

Suggested Citation

  • Bajo, Emanuele & Barbi, Massimiliano, 2018. "Financial illiteracy and mortgage refinancing decisions," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 279-296.
  • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:279-296
    DOI: 10.1016/j.jbankfin.2018.08.001
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    References listed on IDEAS

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    Cited by:

    1. Andersen, Steffen & Campbell, John Y. & Meisner-Nielsen, Kasper & Ramadorai, Tarun, 2014. "Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market," Scholarly Articles 17492179, Harvard University Department of Economics.
    2. Steffen Andersen & John Y. Campbell & Kasper Meisner Nielsen & Tarun Ramadorai, 2020. "Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market," American Economic Review, American Economic Association, vol. 110(10), pages 3184-3230, October.
    3. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2016. "International Comparative Household Finance," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 111-144, October.
    4. Brunetti, M. & Ciciretti, R. & Djordjevic, Lj., 2020. "Till mortgage do us part: Mortgage switching costs and household's bank switching," Journal of Banking & Finance, Elsevier, vol. 119(C).
    5. Martin Hauptfleisch, 2019. "Financial Decision-Making Using Data," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2019, August.
    6. Leonardo Gambacorta & Luigi Guiso & Paolo Emilio Mistrulli & Andrea Pozzi & Anton Tsoy, 2019. "The cost of steering in financial markets: evidence from the mortgage market," BIS Working Papers 835, Bank for International Settlements.
    7. Timmons, Shane & Barjaková, Martina & McElvaney, Terry & Lunn, Pete, 2019. "Can official advice improve mortgage-holders’ perceptions of switching? An experimental investigation," Papers WP612, Economic and Social Research Institute (ESRI).

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    More about this item

    Keywords

    Mortgage refinancing; Financial literacy; Household finance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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