Predictive modelling applied to the retention of mortgages

Abstract

The mortgage is potentially one of the most profitable products in the financial services sector. The costs involved in selling mortgages are, however, high, thus profits are only made if mortgage contracts are not transferred after just a short period. As a result of the decrease in interest rates in the 1990s clients do often transfer mortgages that were acquired at a time when interest rates were higher, because they can realise a lower interest rate by doing so. There are other reasons for transferring a mortgage, eg on the advice of a sales representative working for a competitor or because of dissatisfaction with the service of the current mortgage provider. Therefore, techniques that can support marketing strategies aimed at the retention of mortgage contracts are useful for this business sector. This paper discusses building models to support such strategies and techniques for testing strategies for mortgage retention. The propositions are illustrated using hypothetical examples, clarifying how practitioners can implement the proposed approaches towards the retention of mortgages.