Work

Cautious but short-sighted: Inflation and mortgage strategy in low-income households

Year: 2025

Type: article

Abstract: • Low-SES borrowers adopt lower PTI and LTV ratios indicating strategic caution. • Low-SES households tend to mis-time CPI indexation. • Loans originated when inflation expectations are higher lead to faster repayment growth. • Findings underscore that improving financial literacy is critical. We study mortgage choices among low-socioeconomic-status (SES) borrowers, focusing on payment-to-income (PTI), loan-to-value (LTV), and inflation indexation decisions. Contrary to expectations of tighter financial constraints, low-SES households adopt a cautious stance at origination, selecting lower PTI and LTV ratios than higher-SES borrowers. Yet this short-term prudence proves short-sighted: many mistime their decision to link repayments to the consumer price index (CPI), exposing themselves to wage–price gaps where indexed payments outpace income growth. Using a simulation-based sensitivity analysis, we show that the probability of rising PTI over the life of the loan is systematically higher for low-SES households, especially when mortgages are originated in periods of elevated inflation expectations. These findings highlight the long-run repayment risks faced by vulnerable borrowers and underscore the importance of targeted financial education and advisory tools to improve mortgage decisions.

Source: Finance research letters

DOI: 10.1016/j.frl.2025.108354

Authors: Mordechai Ilan, Yevgeny Mugerman

Institution: Bar-Ilan University

Language: English

Topic: Housing Market and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: No poverty, Reduced inequalities

Open Access status: hybrid

Estimated APC paid: $3,730