Pre-test credit, urges ESRI

Pre-test credit, urges ESRI

By Eamon Quinn

Introductory mortgages are likely to cost consumers in the long-term but may not automatically be undesirable for some squeezed householders.

That’s one of the findings of a major piece of research by the Economic and Social Research Institute (ESRI) on the way that financial institutions design financial products, not necessarily to the benefit of consumers.

The study, ‘Do some financial product features negatively affect consumer decisions?’, by Pete Lunn, Féidhlim McGowan, and Noel Howard, draws on the growing discipline of behavioural economics to assess ways consumers are misled or confused by the pricing of mortgages, loans, and point-of-sale insurance and calls for the “pre-testing” of new financial products on behalf of consumers.

On mortgages, introductory offers can confuse potential homeowners worn down by assessing offers, while banks selling the mortgages knowingly sell the products to target buyers who can be befuddled by the “overall complexity of mortgage products”.

“Evidence from multiple methods implies that introductory offers on mortgages have the potential to cause consumer detriment. Experimental evidence also suggests that this salient mortgage feature may be more enticing when consumers are experiencing decision fatigue,” the ESRI found.

The affordable initial monthly repayments attract present-biased consumers who do not necessarily consider the long-term repayment schedule after the reset rate.

“Advertising and empirical evidence indicates that these consumers are often specifically targeted by sellers of these mortgages,” they write.

Nonetheless, the ESRI writers suggest that introductory mortgage offers may not in all cases be a bad thing because there is some evidence that savvy “income-constrained households” use them to their advantage.

The researchers add to the evidence that consumers are poor at deciding the cost of credit charged on credit cards and on so-called payday loans.

Publishing the cash costs rather than APR rates are likely to be the best way for some consumers to understand the costs better.

And they say there is widespread research against selling insurance on goods and services at the point of sale, which “has a detrimental impact on deliberation by consumers”.

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