Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis

Erwin Charlier and Arjan Van Bussel

Real Estate Economics, 2003, vol. 31, issue 2, 165-204

Abstract: The suboptimal exercise of the prepayment option in a mortgage is relevant for mortgage pricing and the management of a mortgage portfolio. Construction of an accurate prepayment model requires quantification of driving factors such as seasoning, seasonality, refinance incentive and burnout. We focus on Dutch mortgages but also discuss the Dutch market in a European setting. Within the euro‐denominated MBS market, the Dutch market is often referred to as the benchmark market. In our application we include typical Dutch market and contract characteristics such as the annual penalty‐free prepayment of 10 to 20% of the original loan amount. We use loan‐level historical data on mortgages originated between January 1989 and June 1999 to estimate separate models for two popular redemption types: savings mortgages and interest‐only mortgages. In both models we allow for suboptimal prepayment behavior. The results clearly indicate that prepayment rates depend on interest rates and the age of the mortgage contract. Moreover, we find that burnout is an important element in describing the prepayment behavior of Dutch mortgagors.

Date: 2003
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