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Why do Italian households prefer adjustable rate mortgages?

Why do Italian households prefer adjustable rate mortgages? Purpose – In Italy three quarters of the stock of households' mortgage debt is exposed to interest rate risk. The aim of this paper is to explain why the majority of mortgage holders in the Italian residential mortgage market have chosen a mortgage with a variable interest rate. Design/methodology/approach – The empirical analysis has been carried out on a sample of 959 Italian households on the basis of data from the Survey on Household Income and Wealth by the Bank of Italy and covers the period between 1997 and 2006. Findings – The outcomes raise some doubts about the efficiency of the Italian mortgage market in terms of risk allocation between banks and householders. Fixed rate mortgage (FRM) versus adjustable rate mortgage (ARM) choice appears to be guided by a short‐term outlook informed by the need to maximize a household's immediate utility. Furthermore, households seem to embrace a myopic perspective, since the preference for ARMs increases with the lengthening of the maturity of the mortgage and with any increase in the size of the principal amount. Also, lending policies appear to have a considerable influence on a household's FRM‐ARM choice. Practical implications – It seems that the Italian mortgage market requires adequate initiatives to improve households' financial literacy. Some measures to mitigate the assumption of the interest rate risk by households would be also welcomed. Originality/value – This study represents the first investigation into the relationship between lending policies of banks and householders' mortgage choice from the perspective of a country distinguished by a high and persistent preference for the adjustable rate mortgages. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Why do Italian households prefer adjustable rate mortgages?

Paola Zocchi
Journal of European Real Estate Research , Volume 6 (1): 21 – May 3, 2013
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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-9269
DOI
10.1108/17539261311312997
Publisher site
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Abstract

Purpose – In Italy three quarters of the stock of households' mortgage debt is exposed to interest rate risk. The aim of this paper is to explain why the majority of mortgage holders in the Italian residential mortgage market have chosen a mortgage with a variable interest rate. Design/methodology/approach – The empirical analysis has been carried out on a sample of 959 Italian households on the basis of data from the Survey on Household Income and Wealth by the Bank of Italy and covers the period between 1997 and 2006. Findings – The outcomes raise some doubts about the efficiency of the Italian mortgage market in terms of risk allocation between banks and householders. Fixed rate mortgage (FRM) versus adjustable rate mortgage (ARM) choice appears to be guided by a short‐term outlook informed by the need to maximize a household's immediate utility. Furthermore, households seem to embrace a myopic perspective, since the preference for ARMs increases with the lengthening of the maturity of the mortgage and with any increase in the size of the principal amount. Also, lending policies appear to have a considerable influence on a household's FRM‐ARM choice. Practical implications – It seems that the Italian mortgage market requires adequate initiatives to improve households' financial literacy. Some measures to mitigate the assumption of the interest rate risk by households would be also welcomed. Originality/value – This study represents the first investigation into the relationship between lending policies of banks and householders' mortgage choice from the perspective of a country distinguished by a high and persistent preference for the adjustable rate mortgages.

Journal

Journal of European Real Estate Research – Emerald Publishing

Published: May 3, 2013

Keywords: Italy; Residential property; Mortgages; Consumer behaviour; Mortgage choice; Adjustable rate; Interest rate risk

References

  • Consumer reactions to variable rate mortgages
    Albaum, G.
  • Consumer demand for adjustable‐rate mortgages
    Alm, J.R.; Follain, J.R.
  • The efficient market hypothesis in personal finance: choosing an adjustable or a fixed rate mortgage
    Arsham, H.; Ford, D.; Morse, J.N.
  • Survey of Household Income and Wealth
    Bank of Italy