Cautious but short-sighted: Inflation and mortgage strategy in low-income households

• Low-SES borrowers adopt lower PTI and LTV ratios indicating strategic caution. • Low-SES households tend to mis-time CPI indexation. • Loans originated when inflation expectations are higher lead to faster repayment growth. • Findings underscore that improving financial literacy is critical. We study mortgage choices among low-socioeconomic-status (SES) borrowers, focusing on payment-to-income (PTI), loan-to-value (LTV), and inflation indexation decisions. Contrary to expectations of tighter financial constraints, low-SES households adopt a cautious stance at origination, selecting lower PTI and LTV ratios than higher-SES borrowers. Yet this short-term prudence proves short-sighted: many mistime their decision to link repayments to the consumer price index (CPI), exposing themselves to wage–price gaps where indexed payments outpace income growth. Using a simulation-based sensitivity analysis, we show that the probability of rising PTI over the life of the loan is systematically higher for low-SES households, especially when mortgages are originated in periods of elevated inflation expectations. These findings highlight the long-run repayment risks faced by vulnerable borrowers and underscore the importance of targeted financial education and advisory tools to improve mortgage decisions.