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. 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. 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 lower default risks. Consequently, banks have to consider borrowers’ purchasing power in determining LTV ratios to enhance the probability of home mortgage repayment.