Mortgage blog: Why being bad at maths could cost you your home
How good are your maths skills? New research has found that if you struggle with numbers then you're more likely to be in arrears with your mortgage payments and have your home repossessed.
The study by the University of Lausanne, in Switzerland, found that the risk of you missing mortgage payments is directly linked to how good your maths skills are. And the author of the report has urged lenders to offer ‘mortgage counselling' to borrowers with poor numeracy.
Borrowers with poor numeracy skills more likely to be in mortgage arrears
The study, published in the Journal Proceedings of the National Academy of Sciences of the United States of America, questioned 339 subprime borrowers in the USA who took out their home loans between 2006 and 2007. It also assessed each individual's numerical abilities in a telephone survey.
The questions that the respondents were asked involved calculating percentages and the basics of compound interest - the idea that the lump sum on which the interest is calculated changes each year. The results of the survey showed that borrowers with poor maths skills were more likely to be in default on their mortgage. Borrowers who did least well at the maths test spent about 25% of the time in arrears on their mortgage payments compared with only 12% for the top group.
Budgeting problems and an overall lack of understanding about the mortgage they had taken out were also likely to have played a part, the researchers said.
The Daily Telegraph reports that it "indicated owners' poor maths skills could have contributed to the mortgage defaults that led to the recent global financial crisis."
Keith Osborne, editor of WhatHouse.co.uk, says: "This research shows that it's not just financial skills that are needed to be able to manage your household finances, but basic maths skills as well. The researchers believe that lenders ought to do more to help people who are less mathematically minded and offer counselling services to help people avoid getting into arrears on their home loans."
Professor Lorenz Goette, the author of the report, said: "We need to think about whether we can teach people to avoid these mistakes. It's always possible for people to spend too much, regardless of their income. Recent studies have found changes in financial education curricula in high schools have important effects on financial decisions later in life, that foreclosure [repossession] counselling can reduce incidences of foreclosure and mathematical skills in general may be more malleable and less genetically driven than previously thought.
"If financial education can reduce sub-optimal financial decision making, this could have profound effects on household behaviour, as suggested by our results."
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