Official advice improves mortgage-holders’ perceptions of switching: experimental evidence

Abstract

Encouraging consumers to switch to lower-rate mortgages is important both for the individual consumer's finances and for functioning competitive markets, but switching rates are low. Given the complexity of mortgages, one potential regulatory intervention that may increase switching rates is to provide independent advice on how to select good mortgage products and how to navigate the switching process. Working with a government consumer protection agency, we conducted an experiment with mortgage-holders to test whether such advice alters perceptions of switching. The experiment tested how the attributes of the offer, perceptions about the switching process, individual feelings of competence and comprehension of the product affect willingness to switch to better offers, both before and after reading the official advice. The advice made consumers more sensitive to interest rate decreases, especially over longer terms. It also increased consumers’ confidence in their ability to select good offers. Overall, the findings imply that advice from policy-makers can change perceptions and increase switching rates. Moreover, the experiment demonstrates how lab studies can contribute to behaviourally informed policy development.

On the Effect of Practice on Exploration and Exploitation of Options and Strategies

“…For example, Ashby and Teodorescu (2019) found that reducing the monetary costs of switching between alternatives reduced inertia biases in a binary choice setting. Similarly, reducing the costs of exploration between service providers, e.g., by enforcing transparency of prices and providing easy comparison tools, reduces information costs and tends to alleviate consumer’s inertia biases (e.g., see Timmons et al, 2019 ; Byrne et al, 2020 ; Marandola et al, 2020 ). In fact, encouraging switching between service providers by reducing the associated switching costs is generally understood as a major factor for improving consumer welfare ( BEREC, 2010 ; Ofcom, 2010 ; Marandola et al, 2020 ; Heiss et al, 2021 ).…”

Ableism differs by disability, gender and social context: Evidence from vignette experiments

“…The vignette experiment reported here formed part of a larger study on attitudes to disability policy, with other stages reported in Timmons et al. (2023). The study was hosted online using Gorilla (Anwyl‐Irvine et al., 2020).…”

“…The total sample size was determined based on the experimental task that required the most power (a list experiment reported in Timmons et al., 2023). The vignettes experiment was designed such that each version of the vignettes would be shown to at least 250 participants, chosen at random.…”

“…They first completed quota screening questions based on their age, gender, location and socio‐economic status. After completing the information and consent form, they completed a list experiment (reported in Timmons et al., 2023). They then began the part of the study reported here.…”

Switching activity in retail financial Markets in Ireland

“…Many consumers recognise their lack of knowledge and the complexity of the market, citing these as reasons not to engage in switching (Byrne et al, 2020a). The fear that many consumers have of making mistakes ties in with experimental evidence suggesting that consumers who have greater awareness of all that is involved in the mortgage switching process are more willing to switch (Timmons, Barjaková, McElvaney and Lunn, 2022). This is because those who perceive the switching costs more accurately and have a more representative perception of market conditions are also less likely to feel that they would make a mistake in their switching decision.…”