The Myopic Choice Between Fixed and Adjustable Rate Mortgages in Flanders

Summary: 

Using data from Flanders (Belgium), Damen Sven and Buyst Erik study the choice between fixed rate mortgages (FRM) and adjustable rate mortgages (ARM). The results indicate that households base their decision on initial mortgage payments and do not consider expected changes in ARM rates. This results in a remarkable large variation in mortgage structure over time in comparison to other countries. An important finding is, however, that borrowers who expect to move in the near future are more likely to choose the FRM. As all mortgages are portable by law, mobile borrowers prefer to reduce variability in mortgage payments, which was not observed in previous empirical studies.

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