The Determinants of Home Mortgage Default Probability: The Effect of Loan and Borrower’s Characteristics

Abstract

. Housing is one of the individuals' basic needs besides food and clothing, and house demand will increase continuously to respond to the increasing population. Consequently, the gaps between housing needs and availability (backlog) in Indonesia remains high. However, home mortgage default probability is still a crucial issue for banks. Investigating the factors that explain home mortgage default probability is important for banks to mitigate the credit default risk. Among these numerous factors, loan and borrowers' characteristics likely play significant roles in determining home mortgage probability. Hence, this study seeks to analyze the effects of credit and borrowers' characteristics on home mortgage default probability. One hundred and thirty-three mortgage customers of the Semarang Branch Office of Bank X are selected as the research sample through the purposive sampling method. Because the dependent variable has discrete values representing different loan qualities (from liquid to doubtful), the data is then analyzed using the ordered probit regression analysis. The results show that loan to value (LTV) is the credit characteristic that affects home mortgage default probability, implying that higher LTV ratios will increase home mortgage default. Meanwhile, education level is the borrower's characteristic that significantly affects home mortgage default probability. This study offers the following managerial implications. First, banks should consider their borrowers' education level. In this respect, education level is closely related to a broader perspective and the amount of income. Second, banks should also consider LTV when allocating home mortgages because it indicates potential borrowers' capacity to pay. Our findings inform banks to take potential borrowers’ education levels into account when making home mortgage credit decisions. Education levels are closely related to broader perspectives and higher income. Meanwhile, LTV (a ratio between credit amount and property value) is related to the capacity to repay. Higher property values imply lower LTV ratios and eventually