Causes of Mortgage Loan Prepayment
Causes of Mortgage Loan Prepayment

Summary/Abstract: Purpose – The default was always found as the main risk that the banks face, as it mainly appears when the interest rates rise. On the other hand, when the interest rates fall, the borrowers may pay off their mortgages earlier. Prepayment behavior has been studied in the US since the early 70s, the article aims to present the development of mortgage risk management and to indicate the change of its assessment in Poland. Design/methodology/approach – A systematic review of the literature and an analysis of the real estate market in the US were used to distinguish the most common reasons for prepayment origination. Findings – The study indicates four reasons for prepayment origination. The borrower’s incentives to prepay are distinguished by the ones caused either by the borrower or market situation. Each of those four reasons indicates situations they occur and presents some standards of its measurements. The study presents difficulties with the measurement of prepayment risk and suggests the areas of focus. Research implications – The risk assessment during the mortgage approval process in Polish banks should include the prepayment risk to limit its scope rather than imposing prepayment penalties.

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