Masters Dissertation

Financial Literacy and Preparedness among Scottish First Time Buyers


Financial literacy is of increasing interest in the wake of the financial crisis of 2008 after financially illiterate individuals were lured into the property-owning dream with financial products of predatory nature in the form of subprime mortgages. Now almost a decade later, it is still important to understand financial literacy among consumers as a way of limiting defaults and other negative micro or macro-financial consequences. This dissertation studies Scottish first-time homebuyers’ approach, financial literacy, and illiteracy. It also strives to investigate the correlation between awareness of one’s own credit score, improvement of said credit score, raising capital for a deposit, awareness of ‘hidden’ fees related to obtaining a mortgage and its impact on financial literacy. This was done through a quantitative study with a snowball sampling strategy targeting citizens and residents in Scotland intending to buy property for the first time. The first section and financial literacy questions were borrowed from Gathergood and Weber’s (2017) article investigating financial literacy among households in England and Wales to utilise the previous research as a benchmark. The second part of the questionnaire was of the author’s own making. The findings of the research were in line with the fact that early maths performance in primary school can be an indicator of the level of financial literacy an individual possesses. The research also showed that individuals with a higher financial literacy score felt more prepared to seek a mortgage. At the same time, the financially illiterate overestimated their preparedness, which is a new concept in the field. The author had two hypotheses throughout the research. The first one stated that individuals with higher financial literacy would be more informed regarding the fees associated with taking out a mortgage, such as solicitors. This proved wrong, and it became clear that there was a correlation that individuals with a high financial literacy would overestimate the costs and plan accordingly. In contrast, the participants with low financial literacy would underestimate and not prepare for the cost to the same extent. The second hypothesis regarded the participant’s awareness of their individual credit score and their correlation to financial literacy. The data did not prove this. However, there was a correlation between the length of time to improve one’s own credit score before seeking a mortgage and financial literacy. The financially literate expressed a longer timeframe to improve their credit score, whereas the financially illiterate stated shorter time periods.

Financial service providers and policymakers can use the findings in the study to better understand the reasoning of the consumer. It could also help pinpoint where the effort in the education system should be put to generate more financially literate and ‘prepared’ consumers. It also highlights that further information needs to be made available to the public about what a lengthy process of increasing one’s credit score is to make people prepare for financial products and services earlier on after making financial mistakes.

Keywords: Financial Literacy, Financial illiteracy, mortgage, first-time buyers, Scottish first-time buyers

Chapter 1. Introduction

1.1 Introduction

This chapter will lay out the base of why this topic is important to study, why it was selected by the author the aims and objectives before giving a brief introduction to each individual chapter.

1.2 Background 

Anthes (2004) considers that the steady increase in the complexity of consumer financial products and services and a growing shift from external decisions from experts to the average consumer with limited financial literacy created the “perfect storm”. Soon predatory lenders targeted borrowers with complex and expensive loans and mortgages, contributing to the financial crash of 2008 (Lusardi & Mitchell, 2014; Rutledge, 2010). The financial crisis is over, and it increased interest in financial literacy, whereas the average financial literacy (FL) level among consumers has stayed the same. Key researchers such as Lusardi, Mitchell (Lusardi & Mitchell, 2007 & 2011 & 2014), Gathergood (2012; Gathergood & Weber, 2017), Anthes (2004), Gerardi, Goette and Meier (2010 & 2013) have broadened and expanded the field.

Through various schemes, the UK government has promoted first-time buyers seeking loans to acquire their first home and property (Spencer, 2011). One of these schemes is the 5% deposit for first-time buyers purchasing a newly built home (Safieddine & German, 2016). The housing market has steadily increased in price, resulting in reduced affordability; the 5% deposit scheme makes the dream of climbing the property ladder possible. However, mortgage borrowers are exposed to this market due to a lack of knowledge and experience. For mortgage applicants, selecting an appropriate mortgage can be a tricky task, which will impact a household’s finances through what is commonly the largest credit obligation and security (Collins, 2011). However, are our Scottish first-time buyers financially literate enough to make informed mortgage decisions? Television programmes such as Channel 5’s “Can’t pay? We’ll take it away!” highlight the consequences of acquiring property and loans with limited financial literacy can have on a consumer (Channel 5, 2017). Several authors and studies in the field have shown that low financial literacy has a high correlation and, in some cases, causation for mortgage defaults (Collins, 2012; Duca & Kumar, 2014; Gerardi & Goette & Meier, 2010; Gathergood, 2012; Gerardi & Goette & Meier, 2013; Lusardi & Tufano, 2009; Smyczek & Matysiewicz, 2015). It is also suggested that financially literate individuals will explore the mortgage market and compare the best offer to those who are financially illiterate or possess low financial literacy (Lee & Hogarth, 2000).

1.3 Beneficiaries

As financial products and services are increasingly complex, the decisions are shifted to the individual and the household (Anthes, 2004: Rutledge, 2010; Singh, 2014). Therefore understanding the financial literacy level among Scotland’s first-time mortgage borrowers for lenders could be a vital area to predict future loan defaults and loan risks and serves as an investigation of a niche subject in a large area. It also could bring insight into how complex financial products and services are seen and understood by consumers to cater information to their level of understanding rather than the other way around. This information could prove useful for fellow academics, banks, education bodies, regulators, policymakers and other organisations or individuals interested in financial literacy among Scottish first-time buyers.

1.4 Rationale of the Research

The selection of this topic, in particular, is rooted in the author’s ambition to later work in the financial service industry, where complex notions and market statistics need to be presented to internal and external clients in an appropriate manner. Researching this topic has given the researcher insight into an often-overlooked aspect of finance. Furthermore, understanding how financial information is communicated and understood will help in future meetings and presentations to improve the accuracy of such endeavours.

1.5 Research Aim and Objectives

This research aims to investigate various components and their relationship with financial literacy among Scottish first-time buyers. This will include the following:

  • Potential behavioural and personal background components and their relationship with financial literacy;
  • The influence of individual awareness of one’s own credit score and its correlation with financial literacy
  • The timeframe of individual credit score plan of improvement before seeking a mortgage and its potential as a financial literacy level indicator;
  • The consumers raise capital for a deposit, awareness of fees while seeking a mortgage and any potential relationship with financial literacy
  • It also seeks to find the relationship between feeling prepared for seeking a mortgage and financial


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