Demographic Banking -: The Impact of Demographics on Mortgage Pricing

Demographic change influences bank lending practices, which may impact credit risk and the funding conditions of mortgage borrowers. Using internal bank data on mortgages granted in Germany, this study suggests that demographics influence mortgage pricing significantly. Moreover, it highlights the impact of loan characteristics and the bank-borrower relationship on mortgage pricing. Overall, the loan characteristics, in particular the interest rate fixation, seem to play the largest role in the pricing context.

This research contributes to professional practice, by presenting socio-demographic borrower characteristics that promise higher mortgage margins than others. Furthermore, it questions the pricing policy of banks with respect to standard risk factors, such as collateralisation. Finally, the analysis of the bank-borrower relationship indicates that new customers are attracted by lower prices which could be justified from the perspective of a bank if the price concessions pay off in the long run through a more intensive customer relationship.

Overall, the results suggest that demographic change could also provide opportunities for potential gains for banks. Moreover, the analysis indicates that the pricing behaviour with regard to earnings, costs and risk should be constantly monitored and questioned.