Valuation and Optimal Exercise of Dutch Mortgage Loans with Prepayment Restrictions

15 Pages Posted: 26 Mar 2006

See all articles by Bart Kuijpers

Bart Kuijpers

APG Asset Management

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: March 23, 2006

Abstract

Prepayment of Dutch mortgage loans is restricted to a fixed amount per calendar year. Due to path dependence the valuation of these mortgage loans is more complicated than the valuation of unrestricted prepayment options. In this paper we derive an optimal and efficient strategy to price interest-only mortgages with restricted prepayments. For tax reasons an interest-only mortgage is the most popular mortgage type in the Netherlands. The optimal strategy also provides a rational explanation why empirical prepayment models find that prepayments peak in December. Our results indicate that a restricted prepayment option still has significant value.

Keywords: mortgage valuation, partial prepayments, binomial trees

JEL Classification: C61, C63, G21

Suggested Citation

Kuijpers, Bart and Schotman, Peter C., Valuation and Optimal Exercise of Dutch Mortgage Loans with Prepayment Restrictions (March 23, 2006). Available at SSRN: https://ssrn.com/abstract=893266 or http://dx.doi.org/10.2139/ssrn.893266

Bart Kuijpers

APG Asset Management ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Peter C. Schotman (Contact Author)

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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