Financial incentives for mortgage prepayment behavior: Evidence from Dutch micro data

Stefan P.T. Groot, Arjan M. Lejour

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper exploits a unique set of Dutch micro data between 2006 and 2014 to analyze the heterogeneous responses in prepayment behavior to changes in financial incentives. Prepayment is defined as paying back a part of the mortgage on top of the contractual payment schedule, excluding refinancing. Because interest rates on savings have decreased while the rates on existing mortgages are generally fixed for some years, the value of prepaying a mortgage has increased. This corresponds with the surge in prepayments at the Dutch mortgage market. Using various econometric specifications, that take into account unobserved heterogeneity and endogeneity, the paper finds that incentives to prepay explain only a part of prepayment behavior. However, incentives to prepay explain a much larger part of prepayments for wealthier households and for households with a high net-of-tax interest rate differential.
Original languageEnglish
Pages (from-to)237-250
JournalJournal of Housing Economics
Volume41
DOIs
Publication statusPublished - 1 Sep 2018

Fingerprint

Prepayment
Micro data
Mortgage prepayment
Financial incentives
Mortgages
Household
Incentives
Unobserved heterogeneity
Interest rate differentials
Payment
Mortgage market
Econometrics
Tax
Endogeneity
Interest rates
Schedule
Savings
Refinancing

Keywords

  • Financial incentives
  • Housing market
  • Mortgages
  • Prepayment behavior

Cite this

@article{52aa364cdf5d4628a9c83f791eeec0f2,
title = "Financial incentives for mortgage prepayment behavior: Evidence from Dutch micro data",
abstract = "This paper exploits a unique set of Dutch micro data between 2006 and 2014 to analyze the heterogeneous responses in prepayment behavior to changes in financial incentives. Prepayment is defined as paying back a part of the mortgage on top of the contractual payment schedule, excluding refinancing. Because interest rates on savings have decreased while the rates on existing mortgages are generally fixed for some years, the value of prepaying a mortgage has increased. This corresponds with the surge in prepayments at the Dutch mortgage market. Using various econometric specifications, that take into account unobserved heterogeneity and endogeneity, the paper finds that incentives to prepay explain only a part of prepayment behavior. However, incentives to prepay explain a much larger part of prepayments for wealthier households and for households with a high net-of-tax interest rate differential.",
keywords = "Financial incentives, Housing market, Mortgages, Prepayment behavior",
author = "Groot, {Stefan P.T.} and Lejour, {Arjan M.}",
year = "2018",
month = "9",
day = "1",
doi = "10.1016/j.jhe.2018.07.001",
language = "English",
volume = "41",
pages = "237--250",
journal = "Journal of Housing Economics",
issn = "1051-1377",
publisher = "ACADEMIC PRESS INC ELSEVIER SCIENCE",

}

Financial incentives for mortgage prepayment behavior : Evidence from Dutch micro data. / Groot, Stefan P.T.; Lejour, Arjan M.

In: Journal of Housing Economics, Vol. 41, 01.09.2018, p. 237-250.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Financial incentives for mortgage prepayment behavior

T2 - Evidence from Dutch micro data

AU - Groot, Stefan P.T.

AU - Lejour, Arjan M.

PY - 2018/9/1

Y1 - 2018/9/1

N2 - This paper exploits a unique set of Dutch micro data between 2006 and 2014 to analyze the heterogeneous responses in prepayment behavior to changes in financial incentives. Prepayment is defined as paying back a part of the mortgage on top of the contractual payment schedule, excluding refinancing. Because interest rates on savings have decreased while the rates on existing mortgages are generally fixed for some years, the value of prepaying a mortgage has increased. This corresponds with the surge in prepayments at the Dutch mortgage market. Using various econometric specifications, that take into account unobserved heterogeneity and endogeneity, the paper finds that incentives to prepay explain only a part of prepayment behavior. However, incentives to prepay explain a much larger part of prepayments for wealthier households and for households with a high net-of-tax interest rate differential.

AB - This paper exploits a unique set of Dutch micro data between 2006 and 2014 to analyze the heterogeneous responses in prepayment behavior to changes in financial incentives. Prepayment is defined as paying back a part of the mortgage on top of the contractual payment schedule, excluding refinancing. Because interest rates on savings have decreased while the rates on existing mortgages are generally fixed for some years, the value of prepaying a mortgage has increased. This corresponds with the surge in prepayments at the Dutch mortgage market. Using various econometric specifications, that take into account unobserved heterogeneity and endogeneity, the paper finds that incentives to prepay explain only a part of prepayment behavior. However, incentives to prepay explain a much larger part of prepayments for wealthier households and for households with a high net-of-tax interest rate differential.

KW - Financial incentives

KW - Housing market

KW - Mortgages

KW - Prepayment behavior

U2 - 10.1016/j.jhe.2018.07.001

DO - 10.1016/j.jhe.2018.07.001

M3 - Article

VL - 41

SP - 237

EP - 250

JO - Journal of Housing Economics

JF - Journal of Housing Economics

SN - 1051-1377

ER -