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Determinants of curtailments in Dutch residential mortgages

Driessens, W.J.S.F (2021) Determinants of curtailments in Dutch residential mortgages.

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Abstract:Curtailments are payments on a mortgage outside the contractual redemption schedule that are smaller than the outstanding debt of the mortgage. Mortgages are subject to behavioral option risk because curtailments can alter the level and timing of the cash flows of the bank. To provide insight in curtailment behavior of mortgage customers, we study how different determinants affect curtailments of Dutch private residential mortgages. We studied the impact of determinants on the probability of curtailment using a multivariate logistic regression model. Where previous literature studies different determinants of curtailments, activity-specific determinants were not part of the scope. Activity-specific determinants represent curtailment decisions or actions made by a borrower over the lifetime of his mortgage. With use of a multivariate logistic regression model, we find that activity-specific determinants significantly affect the probability of curtailment compared to other determinants. Borrowers with record of past curtailment, are more likely to curtail again. In addition, borrowers that made partial prepayments in higher frequency are also more likely to curtail again. However, the higher the percentage of the original principal amount that is prepaid within one year, the less likely a borrower is to curtail in the next period.
Item Type:Essay (Master)
Clients:
Rabobank
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/85904
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