Prepayment behavior of China's mortgage borrowers: evidence from the loan-level data

Purpose - There exists a large volume of literature evaluating the mortgage prepayment risk based on the USA's and other developed countries' experiences. With access to detailed loan- level data provided by a national mortgage lender in China, the purpose of this paper is to revisit the empirical question of the determinants of mortgage prepayment probability. Design/methodology/approach - The paper utilizes unique loan-level data from a large national residential mortgage lender in China to provide insights into borrowers' prepayment behavior in China under recent market conditions, focusing on the customers' behavior and the segmentation analysis of the prepayment risk. Findings - The results from a logit model indicate that housing appreciation rate and the stock market performance are important considerations for Chinese borrowers. It was also found that borrowers show the heterogeneous prepayment behavior in different groups. For instance, households who purchase new houses are less sensitive to the LTV ratio. These findings provide empirical support for the risk management in the rapid growing mortgage market in China as well as those in other transitional economies. Research limitations/implications - Because of the lack of the literature in the immature mortgage markets, the research results may lack generalizability. Therefore, researchers are encouraged to test the proposed propositions further using their own datasets. Practical implications - The paper includes implications for policy makers to further strategic decision making using a quantitative framework which has not been fully developed in most of the state-owned banks in China. Originality/value - This paper has contributed to the analysis of Chinese mortgage prepayment pattern using a large recent micro-loan level data set. As mortgage borrowers' behavior can be country specific due to the differences in housing policies and housing market structure, this paper sheds new light on the driver factors determining mortgage prepayment in China's mortgage market.