What role do demand deposits play in mortgage lending for commercial banks?

Demand deposits serve as a crucial source of funding for mortgage lending within commercial banks. When customers deposit money into their checking accounts, these funds are typically available for withdrawal at any time. Banks can then use a portion of these deposits to issue loans, including mortgages. This capability allows banks to finance home purchases and provides liquidity in the mortgage market.

The importance of demand deposits lies in their ability to create a stable funding base that banks can leverage to provide long-term loans, such as mortgages, while also managing their liquidity and obligation to customers seeking immediate access to their funds. This process is essential for maintaining the flow of credit in the economy, particularly in real estate financing.

Other choices do not align with the primary function of demand deposits in the context of mortgage lending. For example, while they can indirectly impact interest rates, demand deposits do not directly minimize interest expenses or provide short-term loans, nor do they serve as capital specifically designated for real estate projects. Therefore, the identification of demand deposits as a source of funding accurately represents their role in the framework of mortgage lending.