Homebuyers are more likely to choose alternative mortgage products if they have a poor grasp of financial matters and give scant thought to their financial future, John Gathergood has warned.
A study co-authored by the associate professor at the University of Nottingham’s School of Economics has revealed poor financial literacy among holders of alternative mortgage products, and a significant lack of knowledge of mortgage products in general.
Mr Gathergood said: “Our study suggests that one reason AMPs often perform poorly is that they attract consumers who are less likely to understand their features and who do not think ahead. We need to find ways of addressing this issue, otherwise the repercussions – not just for these consumers but on a far wider scale – could be extremely serious.”
The 44-page study Financial Literacy, Present Bias and Alternative Mortgage Products has shown that AMP holders performed worse than standard mortgage holders on questions designed to gauge their understanding of such concepts as interest rates, compound interest and amortisation.
The respondents did particularly badly when challenged to recognise circumstances under which a mortgage would never be repaid.
Further analysis showed that 21 per cent of AMP holders were more likely than other mortgage holders to be more concerned with the present than the future.
Mr Gathergood, who co-authored the study with Jörg Weber, said that the study showed that more had to be done to clarify how financial products work, and the likely long-term implications of choosing them.
“AMPs can provide flexible solutions for responsible and rational borrowers, but in the wrong hands they can allow people to get into financial situations they just cannot handle,” he added.
Jeremy Duncombe, director of L&G Mortgage Club, said: “There is a significant difference in potential savings depending on when borrowers review their mortgage deals.
“Anyone who is not sure about whether they could save money on their mortgage repayments should speak to a broker who will be able to advise them on the products available to them based on their personal circumstances.”
Mike Richards, director of London-based Mortgage Concepts Associates, said: “In general most people have basic knowledge about a mortgage: namely, that it has a repayment term, and they will have to pay a certain amount back over that time.
“However, with alternative products I think they do not understand what they have. For example, bridging is becoming more relevant, as people need to use this more but there is a need for clarity and people should go to a broker for help.”