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Optimal prepayment of Dutch mortgages

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  • Bart H. M. Kuijpers
  • Peter C. Schotman

Abstract

Valuation of the prepayment option in Dutch mortgages is complicated. In the Netherlands, mortgagors are not allowed to prepay the full mortgage loan without a compensating penalty. Only a limited amount of the initial mortgage loan can be prepaid penalty‐free. We introduce a general model formulation for the valuation of limited callable mortgages, based on binomial trees. This model can be used for determining both the optimal prepayment strategy and the value of embedded prepayment options. For some mortgage types the prepayment option can be valued exactly, whereas other types require approximative methods for efficient valuation. The heuristic we propose here determines the prepayment option value efficiently and accurately for general mortgage types.

Suggested Citation

  • Bart H. M. Kuijpers & Peter C. Schotman, 2007. "Optimal prepayment of Dutch mortgages," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 61(1), pages 137-155, February.
    • Handle: RePEc:bla:stanee:v:61:y:2007:i:1:p:137-155
    DOI: 10.1111/j.1467-9574.2007.00349.x
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    Cited by:

    1. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Emanuele Casamassima & Lech A. Grzelak & Frank A. Mulder & Cornelis W. Oosterlee, 2021. "Pricing and Hedging Prepayment Risk in a Mortgage Portfolio," Papers 2109.14977, arXiv.org, revised Oct 2021.
    4. Liang, Te-Hsin & Lin, Jian-Bang, 2014. "A two-stage segment and prediction model for mortgage prepayment prediction and management," International Journal of Forecasting, Elsevier, vol. 30(2), pages 328-343.

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