We examine peer effects in mortgage borrowing decisions. We find that having financially literate colleagues improves the borrowing decisions of financially less literate co‐workers. Interest rates on the mortgage loans of these co‐workers are significantly lower than for similar employees, whose peers have lower financial literacy. The magnitude of the effect is economically significant, amounting to roughly 4 to 5 monthly instalments until maturity. The results are heterogeneous: advice is more valuable for borrowers with low mathematical skills, and the peer effect is considerably higher in districts, where competition is weaker among banks. We also find that introducing a standardised loan product can offset the impact of the peer effect by making the decision problem of borrowers less complex.
JEL Codes: J24, G21, G41.
Keywords: peer effects, skills, borrowing decisions, mortgage loan, standardised loan product.