Conned by a Cashback? Disclosure, Nudges and Consumer Rationality in Mortgage Choice

Abstract

Financial products with a cashback feature typically cost consumers more in the long run, but their popularity is rising in the mortgage and credit markets. Using a nationally representative online sample from Ireland, we find that consumers who are younger, less educated and suffer from present bias are more likely to choose costly cash back mortgages. Through a series of experiments, we provide strong evidence that advanced disclosure improves financial decision making of customers and that negative nudges, or advertising, encourages prospective buyers into more costly mortgages. We also find evidence that consumers who demonstrate limited attention bias choose more expensive cashback mortgages that are financially equivalent at the point of drawdown.

Switching activity in retail financial Markets in Ireland

“…For the other products, there was a general focus on limiting expenses, possibly due to a change in the person's financial circumstances. An immediate monetary reward in the form of cashback was also a strong motivator for switching mortgages, although the literature suggests that placing too much importance on cashback may lead to suboptimal decisions (King and Singh, 2018;Timmons et al, 2019). A better price on an alternative was the highest ranked pull factor when considering offers.…”