Essays on Household Finance

Household financial behaviour and the outcomes associated with these decisions remain a focal point in microeconomic literature. The widespread mistakes made in the selection, and usage, of financial products is a prominent feature of markets. This thesis contains three essays on household financial decision making. The first essay examines the mortgage choice decision, the second focuses on mortgage refinancing and the third investigates credit card repayment behaviour. Chapter 1 provides an introduction to each of these three essays. In Chapter 2, the role of borrower characteristics and behavioural influences are explored to establish if factors outside traditional pricing measures impact selection of a mortgage product. The chapter uses a bespoke survey to highlight that while pricing matters, future interest rate expectations are a key motivating factor in the mortgage choice decision. Borrowers who anticipate future interest rate volatility are more likely to choose stable fixed rates, while those who expect a fall in rates select adjustable products that will facilitate reduced repayments. In addition to this, the accuracy of expectations are investigated and I find that the presence of a high degree of education, and level of financial literacy, improves predictions. Chapter 3 provides a study of mortgage refinancing inertia across distressed and non-distressed borrowers through the exploration of a letter offer issued by a bank. Using a loan level dataset of mortgages, I show that despite no financial cost only a third of eligible borrowers took up the cost free offer. However, there is evidence that borrowers react to the monetary incentives available, as higher savings are linked to a greater probability of refinancing. I explore the role of borrower and mortgage characteristics, with the presence of financial distress acting as a deterrent to engagement. The use of a letter offer by the bank is examined, with the degree of administrative steps to be overcome identified as a barrier to refinancing. Chapter 4 outlines the mismanagement of dual credit card balances and repayments using a large scale credit register dataset. Borrowers deviate from the optimal as balances are not allocated efficiently and excess payments are not used to reduce balances on higher interest rate cards. The scale of error is shown to vary across both monetary amount and borrower experience. A novel result finds that the experience gained from engaging with other credit products is linked with lower levels of repayment error. Evidence is also provided on the mismanagement of one product being connected with negative outcomes on another, with those in arrears on other products more likely to incur charges for subminimum payments. Lastly, Chapter 5 summarises the findings of the thesis and concludes with considerations for policy-makers and future avenues of research.