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Consumers’ mortgage behaviour: insights from the AFM

How can we encourage consumers to pay more attention to their mortgages? We spoke with Stefanie de Beer, senior supervisor and behavioural economist at the Dutch Authority for Financial Markets (AFM), about their research and new report, “Experimenting: Activating Learning Together.”
Financial well-being is the hallmark of a healthy society. Yet most of us do not put nearly enough thought into our financial situation. Busy with work and family life, we put off the task of overhauling our finances to an unspecified future date. All too often, this future never comes.
If we are to be financially healthy, then we need to make our finances part of our everyday lives – much in the same way that meals, exercise, and medical check-ups are routine. The problem is that tasks involving long-term finances never seem very pressing. Short due dates and high penalties motivate us to pay our bills and debts, but checking our mortgage conditions or shopping around for better investments always feel like they can be put off for tomorrow.
The research
As part of a broader series of experiments aimed at promoting consumer choice, the AFM, ING and Florius carried out behavioural science experiments with Dutch people who hold interest-only mortgages.
According to the report, some interest-only mortgages are risky because holders cannot always afford to pay off or repay their loan when the interest-free period ends. Even if holders can repay their loan, affordability is an issue for some of them. It is important to nudge consumers towards assessing their ability to repay, and perhaps making voluntary repayments or taking other actions to decrease risk.
The researchers used several methods to nudge consumers. In both experiments, there was a control group and a group that received a new treatment. In the ING experiment, a group of customers were sent a text message to remind them to open a message online about paying off their mortgage. In the Florius experiment, 1000 (out of 5000) customers received a letter and a voucher that partially covered the cost of financial advice.
The results
The research with ING indicated that the text messages encouraged consumers to open their online messages. Almost 66% of customers opened the message after receiving the SMS, compared to only 52% of people who did not receive the SMS.
Florius’s combination of a letter and voucher also increased the number of customers taking action from 5% to almost 9%. Moreover, these customers tended to take concrete action to improve their financial situation.
According to Stefanie de Beer, senior supervisor and behavioural economist at the AFM, the lesson here is that it is not enough to encourage customers to read information. They need to be nudged more strongly to take action. She explains, “It is important to identify all the hurdles in the process and then come up with interventions to mitigate all these barriers.”
Stefanie told us personalised communication is a cheap, easy to implement and activates customers, since they could easily see how high their debt was and figure out how to decrease their risk. However, she notes while higher monthly payments can help people to reduce their risk, they act as a deterrent. People “don’t want to feel the pain in the short term”, even if this improves their long-term position.

“What we saw in both experiments was that people who could reduce their interest rates were more likely to take action.” explained Stefanie. “That could be an important starting point for further research.”

 What should FSPs do?
 There is plenty of action that financial service providers (FSPs) can take, says Stefanie. These include:

  • Identifying the hurdles people face and the points where they drop out
  • Using behavioural economics to shape communication
  • Add different forms of financial incentives to nudge action, such as payment intervals and taking advantage of low interest rates

The report encourages financial service providers to invest in behavioural research to improve their products and engagement. All too often, Stefanie says, our assumptions about how people behave turn out to be wrong. It’s essential to “test, test, test” to know whether what we’re doing actually works. Stefanie explains:

“People don’t behave completely rationally. Product design, distribution, and information all impact the decisions that people make. Companies have to realise that there is really no neutral way of designing things, so you’ll always influence people in a certain direction. So it’s better to think about the desired outcomes and design your information distribution according to that.”

Stefanie’s advice is especially relevant for the new fintech products coming onto the market. We often see technology as the solution for all problems. While fintech can certainly help with customer engagement and financial literacy, it is unlikely to solve all problems. Rather than throwing money at technology, experimenting first can tell us whether the investment is worthwhile.
By Erin Taylor, Senior Researcher

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